hsbc amanah malaysia berhad (company no. … · 2020-06-15 · hsbc amanah malaysia berhad (company...

HSBC AMANAH MALAYSIA BERHAD(Company No. 200801006421 (807705-X))

(Incorporated in Malaysia)

FINANCIAL STATEMENTS – 31 DECEMBER 2019

Domiciled in MalaysiaRegistered Office:

10th Floor, North Tower

2, Leboh Ampang

50100 Kuala Lumpur



CONTENTS

1 Board of Directors

2 Corporate Governance Disclosures

6 Board Responsibility and Oversight

Board of Directors

Board Committees

12 Management Reports

13 Internal Control Framework

15 Remuneration Policy

15 Rating by External Rating Agencies

16 Directors' Report

24 Directors' Statement

25 Statutory Declaration

26 Shariah Committee's Report

28 Independent Auditors' Report

32 Statement of Financial Position

33 Statement of Profit or Loss

34 Statement of Comprehensive Income

35 Statement of Changes in Equity

37 Statement of Cash Flows

40 Notes to the Financial Statements



BOARD OF DIRECTORS

Datuk Kamaruddin bin TaibIndependent Non-Executive Chairman

Stuart Paterson MilneNon-Independent Executive Director

Mukhtar Malik HussainNon-Independent Executive Director

Adil AhmadIndependent Non-Executive Director

Lee Choo HockNon-Independent Non-Executive Director (re-designated as Non-Independent on 30 May 2019)

Albert Quah Chei JinIndependent Non-Executive Director

Ho Chai HueyIndependent Non-Executive Director

1



CORPORATE GOVERNANCE DISCLOSURES

The statement of corporate governance practices set out on pages 2 to 15 and the information referred to thereinconstitutes the Corporate Governance Report of HSBC Amanah Malaysia Berhad (the Bank). As a banking institutionlicensed under the Islamic Financial Services Act 2013, the Bank complies with the corporate governance standards setout in the Bank Negara Malaysia (BNM) Policy Document on Corporate Governance (BNM Corporate GovernancePolicy).

Directors

The Directors serving as at the date of this report are set out below:

Datuk Kamaruddin bin Taib, 63Independent Non-Executive ChairmanMember of Audit Committee and Nominations and Remuneration CommitteeAppointed to the Board and as Chairman: January 2018

Datuk Kamaruddin Bin Taib was appointed as Independent Non-Executive Chairman of the Bank on 2 January 2018.He is a member of the Audit Committee and Nominations and Remuneration Committee of the Bank.

Datuk Kamaruddin holds a Bachelor of Science Degree in Mathematics from the University of Salford, UnitedKingdom.

Datuk Kamaruddin is the Chairman of DNV GL Malaysia Sdn Bhd, part of the Global DNV GL Group. He has beenwith the DNV GL Group since 1995, and was a substantial shareholder until December 2016. He retired as the ExecutiveChairman in June 2017.

Datuk Kamaruddin has significant experience in investment banking, corporate finance, mergers and acquisitions. Hiscareer started in 1980 with a leading Investment Bank in Malaysia. Subsequently, he served as a Director of severalprivate companies and companies listed on Bursa Malaysia. He has personal experience in listing several companieson Bursa Malaysia. Apart from his vast experience of serving on the board of companies listed on Bursa Malaysia, hisexperience included serving on the board of companies listed on the Stock Exchange of India as well as listed onNasdaq.

Datuk Kamaruddin is currently the Chairman of GHL Systems Berhad. Datuk Kamaruddin is also a Director of GreatEastern General Insurance (Malaysia) Berhad, FIDE Forum, Fraser & Neave Holdings Berhad, Malaysia SmeltingCorporation Berhad and RAM Holdings Berhad.

Datuk Kamaruddin currently sits as Internal Audit Sub-Committee of The Royal Selangor Golf Club.

Datuk Kamaruddin does not have any shareholding in the Bank.

Stuart Paterson Milne, 60Non-Independent Executive DirectorAppointed to the Board: May 2018

Mr Milne was appointed as the Non-Independent Executive Director on 24 May 2018.

Mr Milne graduated from the University of Durham, United Kingdom with a Bachelor of Arts (Honours) in OrientalStudies (Modern Arabic Studies). He joined HSBC in 1981. Since then, he has worked in a variety of businesses in theUnited Arab Emirates, Hong Kong, the Philippines, France, United States, Japan and India.

Prior to his appointment in Malaysia, he was the CEO of HSBC Japan and HSBC India respectively.

Mr Milne is a Non-Independent Executive Director and Chief Executive Officer (CEO) of HSBC Bank MalaysiaBerhad.

Mr Milne does not have any shareholding in the Bank. His interest in the Bank’s related corporation is as disclosed inthe Directors’ Report on page 17.

2



CORPORATE GOVERNANCE DISCLOSURES (Cont’d)

Mukhtar Malik Hussain, 60

Non-Independent Executive Director

Appointed to the Board: December 2009

Mr Mukhtar was appointed as Non-Independent Executive Director on 15 December 2009.

Mr Mukhtar graduated from the University of Wales with a Bachelor of Science in Economics. He first joined theHSBC Group in 1982 as a graduate trainee in Midland Bank International. He was then appointed as Assistant Directorin Samuel Montagu in 1991. After more than 10 years of working in the HSBC Group’s London offices, Mr Mukhtarheld numerous posts in Dubai, including CEO of HSBC Financial Services (Middle East) Limited from 1995 to 2003.He established the initiative to create the first foreign investment bank in Saudi Arabia for HSBC.

In 2003, Mr Mukhtar assumed the position of CEO, Corporate and Investment Banking. He then headed back to Londonas the Co-Head of Global Banking in 2006. He was the Global Head of Principal Investments in London from 2006 to2008. Between 2008 to 2009, he was the Deputy Chairman of HSBC Bank Middle East Limited and Global CEO ofHSBC Amanah Malaysia Berhad. He was also the CEO, Global Banking and Markets for Middle East and North Africabefore assuming his role as the CEO of the Bank from 2009 to 2018. Mr Mukhtar is currently HSBC Group GeneralManager and Head of Belt & Road Initiatives for HSBC Asia Pacific.

Mr Mukhtar is a Non-Independent Executive Director of HSBC Bank Malaysia Berhad, Director and Chairman ofHSBC Bank (Singapore) Limited.

Mr Mukhtar does not have any shareholding in the Bank. His interest in the Bank’s related corporation is as disclosed

in the Directors’ Report on page 17.

Adil Ahmad, 63

Independent Non-Executive DirectorChairman of the Risk Committee and member of Audit Committee and Nominations and Remuneration Committee

Appointed to the Board: May 2014

Mr Adil was appointed as Independent Non-Executive Director on 5 May 2014. He is the Chairman of Risk Committeeand member of the Audit Committee and Nominations and Remuneration Committee of the Bank.

Mr Adil holds a Masters in Business Administration (Finance & Accounting) and BA in Economics from CornellUniversity, Ithaca, New York. He has 35 years of international banking experience and began his career in the 1980sat ANZ Grindlays Bank Pakistan. He was the Director and Head of Global Islamic Finance of ANZ Investment Bankin London from 1993 to 1997 and thereafter Executive, Group Strategy of ANZ Banking Group Ltd in Melbourne from1997 to 2000. He assumed the position as the Chief Executive Officer of ANZ Banking Group Ltd Vietnam from 2000to 2005. In 2006, he left the ANZ Banking Group to become CEO of Kuwait International Bank, from where he retiredin 2009.

Since retiring to Malaysia, Mr Adil has advised international clients on strategic and financial matters for projects inVietnam, Malaysia and Pakistan and has provided Islamic and conventional banking training programs for banks andother financial institutions.

Mr Adil is currently a council member of GLG (Gerson Lehrman Group) and an Independent Director of FIDE Forum.

Mr Adil does not have any shareholding in the Bank. His interest in the Bank’s related corporation is as disclosed inthe Directors’ Report on page 17.

3




Lee Choo Hock, 67

Non-Independent Non-Executive DirectorMember of the Audit Committee, Risk Committee and Nominations and Remuneration CommitteeAppointed to the Board: May 2016

Mr Lee was appointed as Independent Non-Executive Director on 30 May 2016 and subsequently re-designated asNon-Independent Non-Executive Director on 30 May 2019. He is a member of the Audit Committee, Risk Committeeand Nominations and Remuneration Committee of the Bank.

He is a member of the Institute of Chartered Accountants in England and Wales as well as the Malaysian Institute ofAccountants. He began his career with Miller, Brener & Co., London, a professional accounting firm in 1975 and joinedMalayan Banking Berhad (Maybank) in 1982. Having worked with Maybank for 27 years, Mr Lee has built a successfulcareer as a professional accountant. He served various management positions during his tenure with Maybank until heretired in 2008 and his last position was as the Executive Vice President, Head of Accounting Services and TreasuryBack Office Operations. He has also served as a Director of a number of subsidiaries of Maybank.

He is a Director of Kossan Rubber Industries Berhad, Yayasan Kossan and Independent Non-Executive Director ofHSBC Bank Malaysia Berhad.

Mr Lee does not have any shareholding in the Bank.

Albert Quah Chei Jin, 67

Independent Non-Executive DirectorChairman of Audit Committee and member of Risk Committee and Nominations and Remuneration CommitteeAppointed to the Board: September 2016

Mr Albert Quah was appointed as Independent Non-Executive Director on 5 September 2016. He is the Chairman ofAudit Committee and member of the Risk Committee and Nominations and Remuneration Committee of the Bank.

Mr Albert Quah holds a Masters Degree in Accounting and Finance from the London School of Economics and PoliticalScience. He is a Fellow Member of the Institute of Chartered Accountants in England and Wales and a member of TheMalaysian Institute of Accountants. He was with Touche Ross & Co, Chartered Accountants in London before returningto Malaysia.

Mr Albert Quah has more than 30 years banking experience. Mr Albert Quah began his banking career with SouthernBank Berhad in 1982 where he served in various management positions including as a Card Centre Manager as well asa Corporate Banker. He joined Standard Chartered Bank Malaysia Berhad as Senior Corporate Banker in 1989 and wasthe Chief Financial Officer (CFO) of Standard Chartered Bank Malaysia Berhad from 1993 to 2001. He later served asGroup CFO in the AmBank Group from 2004 to 2006. He retired as CFO of United Overseas Bank Malaysia Berhadin 2013.

In addition to his current role, Mr Albert Quah also sits on the Board of Indah Water Konsortium Sdn Bhd and also theNon-Executive Trustee of Methodist Education Foundation.

Mr Albert Quah does not have any shareholding in the Bank.

4




Ho Chai Huey, 60

Independent Non-Executive DirectorChairman of Nominations and Remuneration Committee and Member of Risk CommitteeAppointed to the Board: January 2018

Ho Chai Huey was appointed as Independent Non-Executive Director on 2 January 2018. She is the Chairman of

Nominations and Remuneration Committee and member of the Risk Committee of the Bank.

Ms Ho graduated from the University of Malaya with a Bachelor of Economics, Honours Class 1 Statistics in 1983.

Her career started with Bank Negara Malaysia (BNM) as an Information Technology (IT) Analyst on 1 August 1983

until she retired as an IT Director on 5 July 2016.

She has been a passionate IT management professional with 33 years of hands-on experiences in formulating and

implementing IT business plans and transformation, leading and advising the implementation of many IT projects and

managing the day-to-day 24 by 7 IT Services and IT Operations in BNM.

During her career with BNM, she drove the planning and implementation of IT Plan and managed a resilient IT

infrastructure in BNM in conformity with international industry standards and best practices. She provided strategic

and operational direction for the planning, designing, implementation and maintenance of IT systems in BNM,

including managing strategic IT projects and technology risk and IT crisis situations as well as ensuring strong IT

governance processes and practices.

Ms Ho is currently an IT and project management consultant to an outsourcing company which provides advisory and

business support functions to affiliated professional institutes in the financial sector.

In addition to her current role, Ms Ho also sits on the Board of Cagamas Berhad.

Ms Ho does not have any shareholding in the Bank.

5




BOARD RESPONSIBILITY AND OVERSIGHT

Board of Directors

The objectives of the management structure within the Bank, headed by the Board of Directors and led by theIndependent Non-Executive Chairman, are to deliver sustainable value to shareholders and promote a culture ofopenness and debate. The Board is responsible for overseeing the management of the Bank and reviewing the Bank’sstrategic plans and key policies. Although the Board delegates the day-to-day management of the Bank’s business andimplementation of strategy to the Executive Committee, certain matters, including annual operating plans, risk appetiteand performance targets, procedures for monitoring and controlling operations, approval of credit or market risk limits,specified senior appointments and any substantial change in balance sheet management policy are reserved by the Boardfor approval.

The Board meets regularly to review reports on performance against financial and other strategic objectives, keybusiness challenges, risk, business developments, and investor and external relations. All Directors have full and timelyaccess to all relevant information and are encouraged to have free and open contact with management at all levels.Directors may take independent professional advice if necessary, at the Bank’s expense.

At the date of this report, the Board consists of seven (7) members comprising two (2) Non-Independent ExecutiveDirectors, one (1) Non-Independent Non-Executive Director and four (4) Independent Directors. The names of theDirectors serving at the date of this report and brief biographical particulars for each of them are set out on pages 2 to5.

Mr Lee Choo Hock was re-designated as Non-Independent Non-Executive Director on 30 May 2019. He was previouslyan Independent Non-Executive Director.

Appointments to the Board are made on merit and candidates are considered against objective criteria, having dueregard to the benefits of diversity on the Board. A rigorous selection process, overseen by the Nominations andRemuneration Committee and based on agreed requirements including BNM Corporate Governance Policyrequirements are followed in relation to the appointment of Directors.

All Directors, including those appointed by the Board to fill a casual vacancy, are subject to annual re-election at theBank’s Annual General Meeting. Non-Executive Directors are appointed for an initial three-year term and, subject tore-election by shareholder at Annual General Meetings, are typically expected to serve two three-year terms. Any termbeyond six (6) years is subject to rigorous review. Tenure of independent Non-Executive Directors shall not exceed acumulative term of nine (9) years.

The terms and conditions of appointment of Non-Executive Directors are set out in a letter of appointment, whichinclude the expectations of them and the time estimated for them to meet their commitment to the Bank. The currentanticipated minimum time of commitment, which is subject to periodic review and adjustment by the Board, is 30 daysper year and with appointment in not more than 5 public listed companies. Time devoted to the Bank could beconsiderably more, particularly if serving on Board committees. All Non-Executive Directors have confirmed they canmeet this requirement.

Independent Non-Executive Directors are not HSBC employees and do not participate in the daily businessmanagement of the Bank. They bring an external perspective, constructively challenge and help develop proposals onstrategy, scrutinise the performance of management in meeting agreed goals and objectives, and monitor the risk profileand reporting of performance of the Bank. The Board has determined that each Non-Executive Director is independentin character and judgment, and there are no relationships or circumstances likely to affect the judgment of theIndependent Non-Executive Directors.

The roles of the Independent Chairman and CEO are separate, with a clear division of responsibilities between therunning of the Board and executive responsibility for running the Bank’s business.

6




BOARD RESPONSIBILITY AND OVERSIGHT (Cont’d)

Board of Directors (Cont’d)

Board and Committee Meetings

Six (6) Board meetings were held in 2019. The table below show each Director’s attendance (including attendance viavideo conferencing) at meetings of all Board and Committees’ meetings during 2019. All Directors have complied withthe Bank Negara Malaysia requirements that Directors must attend at least 75% of Board meetings held in the financialyear.

2019 Board and Committee meetingattendance

BoardAudit

CommitteeRisk

Committee

Nominationsand

RemunerationCommittee

Total number of meetings held 6 4 6 5

Independent Non-Executive Chairman

Datuk Kamaruddin bin Taib 6 4 - 5

Non-Independent Executive Directors

Stuart Paterson Milne 6 - - -

Mukhtar Malik Hussain 5 - - -

Independent Non-Executive Directors

Adil Ahmad 6 4 6 5

Albert Quah Chei Jin 6 4 6 5

Ho Chai Huey 6 - 6 5

Non-Independent Non-Executive DirectorLee Choo Hock[1] 6 4 6 5

[1] Re-designated as Non-Independent Non-Executive Director on 30 May 2019. He was previously an Independent Non-Executive Director.

Directors’ Emoluments

Details of the emoluments of the Directors of the Bank for 2019, disclosed in accordance with the Companies Act 2016,are shown in Note 35(b) to the financial statements.

7





Board of Directors (Cont’d)

Training and Development

Formal, tailored induction programmes are arranged for newly appointed Directors. The induction programmes consistsof a series of meetings with senior executives to enable new Directors to familiarise themselves with the Bank’sbusiness. Directors also received comprehensive guidance from the Company Secretary on Directors’ duties andresponsibilities.

Training and development are provided for Directors and are regularly reviewed by the Nominations and RemunerationCommittee supported by the Company Secretary. Executive Directors develop and refresh their skills and knowledgethrough day-to-day interactions and briefings with senior management of the Bank’s businesses and functions. Non-Executive Directors have access to external training and development resources under the Directors’ training anddevelopment framework approved by the Board. Awareness and discussion sessions were conducted by seniorexecutives and subject matter experts on emerging technologies, financial crime compliance, regulatory initiatives andother business developments.

During the year, Directors have also attended talks, dialogue sessions and focus group sessions organised by FinancialInstitutions Directors’ Education (FIDE) Forum, and have received refresher training and courses related to financialcrime and cybersecurity.

8





Board Committees

The Board has established a number of committees, the membership of which comprise Independent Non-ExecutiveDirectors who have the skills, knowledge and experience relevant to the responsibilities of the committee. The Boardand each Board committee have terms of reference to document their responsibilities and governance procedures. Thedetails of the Board Charter comprising the Board committees’ Terms of Reference are available athttp://www.hsbcamanah.com.my/1/2/amanah/hsbc-amanah-and-you/corporate-information/board-of-directors/.

The key roles of the Board committees are described in the paragraph below. The Chairman of each Board committeereports to each subsequent Board meeting on the activities of the Board committee. Each Board committee will evaluateits terms of reference and its own effectiveness annually.

As at the date of this report, the following are the principal Board committees:

1. Audit Committee

The Audit Committee is accountable to the Board and has non-executive responsibility for oversight of and advice tothe Board on financial reporting including Pillar 3 Disclosures related matters and internal controls over financialreporting, covering all material controls The Audit Committee reviews the financial statements of the Bank beforesubmission to the Board. It also monitors and reviews the effectiveness of the internal audit function and the Bank’sfinancial and accounting policies and practices. The Audit Committee advises the Board on the appointment of theexternal auditors and is responsible for oversight of the external auditors.

The Audit Committee reviews and approves internal audit’s annual plan and also discuss on the internal audit resources.

The Audit Committee meets regularly with the Bank’s senior financial and internal audit management and the externalauditor to consider, inter alia, the Bank’s financial reporting, the nature and scope of audit reviews and the effectivenessof the systems of internal control relating to financial reporting.

The current members of the Audit Committee, majority being Independent Non-Executive Directors, are:• Albert Quah Chei Jin (Chairman)• Adil Ahmad• Lee Choo Hock• Datuk Kamaruddin bin Taib

During 2019, the Audit Committee held 4 meetings. Attendance is set out in the table on page 7.

2. Risk Committee

The Risk Committee is accountable to the Board and has non-executive responsibility for oversight of and advice tothe Board on risk related matters and the principal risks impacting the Bank, risk governance and internal controlsystems (other than internal financial control systems).

The Risk Committee meets regularly with the Bank’s senior financial, risk, internal audit and compliance managementto consider, inter alia, risk reports and the effectiveness of compliance.

The Board and the Risk Committee oversee the maintenance and development of a strong risk management frameworkby continually monitoring the risk environment, top and emerging risks facing the Bank and mitigation actions plannedand taken. The Risk Committee recommends the approval of the Bank’s risk appetite statement to the Board andmonitors performance against the key performance/risk indicators included within the statement. The Risk Committeemonitors the risk profiles for all of the risk categories within the Bank’s business.

9





Board Committees (Cont’d)

2. Risk Committee (Cont’d)

The current members of the Risk Committee, majority being Independent Non-Executive Directors, are:• Adil Ahmad (Chairman)• Lee Choo Hock• Albert Quah Chei Jin• Ho Chai Huey

During 2019, the Risk Committee held 6 meetings. Attendance is set out in the table on page 7.

3. Nominations and Remuneration Committee

The combined Nominations and Remuneration Committee is accountable to the Board and has non-executiveresponsibility for (i) leading the process for Board appointments and for identifying and nominating, for the approvalof the Board, candidates for appointment to the Board; (ii) reviewing the candidates for appointment to the seniormanagement team; (iii) appointment and reappointment of Shariah Committee members; and (iv) supporting the Boardin overseeing the operation of the Bank’s remuneration system and reviewing the remuneration of Directors on theBoard.

The Nominations and Remuneration Committee considers plans for orderly succession to the Board and the appropriatebalance of skills, knowledge and experience on the Board. The Nominations and Remuneration Committee assists theBoard in the evaluation of the Board’s own effectiveness and that of its committees annually. The findings of theperformance evaluation and the implementation of actions arising from the performance evaluation are reported to theBoard during 2019.

CEO’s performance evaluation is undertaken as part of the performance management process for all employees. Theresults will be considered by the Nominations and Remuneration Committees when reviewing the variable pay awards.

The members of the Nominations and Remuneration Committee, majority being Independent Non-Executive Directors,are:• Ho Chai Huey (Chairman)• Adil Ahmad• Albert Quah Chei Jin• Lee Choo Hock• Datuk Kamaruddin bin Taib

During 2019, the Nominations and Remuneration Committee held 5 meetings. Attendance is set out in the table onpage 7.

Delegations by the Board

Shariah Committee

The Shariah Committee was established with delegated authorities of the Board on the Shariah operations andmanagement of day-to-day running of the Bank in accordance with Shariah compliance and principles based on theBoard’s policies and directions.

The current members of the Shariah Committee are:• Asst. Prof Dr Ziyaad Mahomed (Chairman)• Dr Aida binti Othman• Dr Khairul Anuar bin Ahmad• Prof Dr. Younes Soualhi• Dr Mohamed Ashraf bin Mohamed Iqbal

10






Delegations by the Board (Cont’d)

Connected Party Transactions Committee

The Connected Party Transactions Committee is delegated with the authority of the Board to approve transactions witha connected party of the Bank.

The current members of the Connected Party Transactions Committee, are:• Adil Ahmad• Albert Quah Chei Jin• Ho Chai Huey• Chief Risk Officer• Head of Wholesale Credit and Market Risk

Executive Committee

The Executive Committee which consists of key senior management members, meets regularly and operates as a generalmanagement committee under the direct authority of the Board. The committee exercising all of the powers, authoritiesand discretions of the Board in so far as they concern the management and day-to-day running of the Bank, inaccordance with such policies and directions as the Board may from time to time determine. The Bank's CEO, ArsalaanAhmed, chairs the Executive Committee.

To strengthen the governance framework in anticipation of structural and regulatory changes that affect the Bank, thefollowing sub-committees of the Executive Committee were established:

(i) Asset and Liability Management Committee

The Asset and Liability Management Committee is responsible for the efficient management of the Bank’sbalance sheet and the prudent management of capital, liquidity, funding, profit risk in the banking book,structural foreign exchange and strategic equity risk.

(ii) Risk Management Meeting

The Risk Management Meeting is responsible for the oversight of the risk framework. Regular Risk ManagementMeetings (RMM), chaired by the Chief Risk Officer, are held to establish, maintain and periodically review the policyand guidelines for the management of risk within the Bank.

(iii) Financial Crime Risk Management Committee

The Financial Crime Risk Management Committee is responsible for the management of financial crime riskand to support the CEO in discharging the financial crime risk responsibilities.

(iv) IT Steering Committee

The IT Steering Committee is responsible for the oversight of the implementation and development of ITstrategy. The committee is accountable for reviewing, challenging and approving the financial planning and ITperformance.

(v) People Committee

The People Committee is established as a principle human resource forum to drive People Plan i.e. buildcapability, talent, succession and leaders. The Committee oversees the development and delivery of key peopleinitiative or programs, and resolve any critical people risks or issues.

11






Conflicts of Interest and Indemnification of Directors

The Board has adopted a policy and procedures relating to Directors’ conflicts of interest. Where conflicts of interestarise, the Board has the power to authorise them. A review of those conflicts which have been authorised, and the termsof those authorisations, is undertaken by the Audit Committee annually.

The Bank maintained on a group basis, a Directors’ and Officers’ Liability Insurance which provides adequate insurancecover for the Directors and Officers.

None of the Directors had, during the year, any material interest, directly or indirectly, in any contract of significance with theBank. All Directors are regularly reminded of their obligations in respect of disclosure of conflicts or potential conflicts ofinterest in any transactions with the Bank.

MANAGEMENT REPORTS

The Board meetings are structured around a pre-set agenda and reports for discussion, notation and approvals arecirculated in advance of the meeting dates. To enable Directors to keep abreast with the performance of the Bank, keyreports submitted to the Board during the financial year include:

• Minutes of the Board Committees

• Annual Operating Plan

• CEO updates

• Capital Plan

• Credit Transactions and Exposures to Connected Parties

• Financial Crime Compliance: Anti-Money Laundering and Counter Terrorist Financing Reports

• Quarterly and Annual Financial Statements

• Quarterly Internal Audit Progress Reports

• Internal Capital Adequacy Assessment Process

• Risk Appetite Statement

• Risk and Compliance Reports

• Stress Testing Results

12




INTERNAL CONTROL FRAMEWORK

The Board is responsible for maintaining and reviewing the effectiveness of risk management and internal controlsystems, and for determining the aggregate levels and types of risks the Bank is willing to take in achieving theirstrategic objectives.

To meet this requirement and to discharge its obligations, procedures have been designed for safeguarding assets againstunauthorised use or disposal; for maintaining proper accounting records; and for ensuring the reliability and usefulnessof financial information used within the business or for publication.

These procedures provide reasonable assurance against material mis-statement, errors, losses or fraud. They aredesigned to provide effective internal control within the Bank. The procedures have been in place throughout the yearand up to 4 February 2020, the date of approval of the audited financial statements of the Bank for the financial yearended 31 December 2019.

The key risk management and internal control procedures over financial reporting includes the following:

• Entity level controls

The primary mechanism through which comfort over risk management and internal control systems is achievedis through assessments of the effectiveness of entity level controls, and the reporting of risk and control issueson a regular basis through the various risk management and risk governance forums. Entity level controls areinternal controls that have a pervasive influence over the entity as a whole. They include controls related tothe control environment, for example the Bank's values and ethics, the promotion of effective risk managementand the overarching governance exercised by the Board and its non-executive committees.

The design and operational effectiveness of entity level controls are assessed annually as part of the assessmentof the effectiveness of internal controls over financial reporting. If issues are significant to the Bank, they areescalated to the Audit Committee for financial reporting issues and/or the Risk Committee for all other risktypes. HSBC Group has commenced a refresh exercise to simplify the suite of entity level controls relied uponto meet the internal control principles of the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) framework, which is expected to complete in 2020 at HSBC Group level, andsubsequently rolled-out to sites, including HSBC Malaysia.

• Process level transactional controls

Key process level controls that mitigate the risk of financial misstatement are identified, recorded andmonitored in accordance with the risk framework. This includes the identification and assessment of relevantcontrol issues, against which action plans are tracked through to remediation. The Audit Committee and RiskCommittee have continued to receive regular updates on the Bank’s ongoing activities for improving theeffective oversight of 'end-to-end' business processes, which continues to identify opportunities for enhancingkey controls, such as through the use of automation technologies.

• Financial reporting

The Bank’s financial reporting process for preparing the financial statements is in accordance with the

Malaysian Financial Reporting Standards, International Financial Reporting Standards, the requirements of

the Companies Act 2016 in Malaysia and guidelines issued by BNM. The financial reporting process is further

supported by documented accounting policies and reporting formats with detailed instructions and guidance

on the reporting requirements issued by Global Finance to the Bank in advance of each quarterly reporting

period, as well as analytical review procedure. The financial reports of the Bank are subject to certification by

the Chief Financial Officer and Board’s approval.

• Group's Global Principles

The Global Principles set an overarching standard for all other policies and procedures throughout the HSBCGroup and are fundamental to the Bank’s risk management structure. It spells out, and connect, the Bank’spurpose, values, strategy and risk management principles, guiding on what is right and the manner to treatcustomers and colleagues fairly at all times.

13




INTERNAL CONTROL FRAMEWORK (Cont’d)

• Enterprise risk management framework (ERMF)

The ERMF provides an effective and efficient approach to govern and oversee the organisation and monitorand mitigate risks to the delivery of the Bank’s strategy. It applies to all categories of risk, covering coregovernance, standards and principles that bring together all of the Bank’s risk management practices into anintegrated structure.

• Delegation of authority within limits set by the Board

Authority to manage the day to day running of the Bank is delegated within limits set by the Board to the Chief

Executive who has responsibility for overseeing the establishment and maintenance of systems of control

appropriate to the business and who has the authority to delegate such duties and responsibilities as he sees fit.

Appointments to the most senior positions within the Bank require the approval of the Board of Directors.

• Subsidiary Certifications

Half yearly confirmations are provided to the parent bank’s Audit Committee from the Audit Committee of

the Bank regarding whether the financial statements have been prepared in accordance with HSBC Group

policies, present fairly the state of affairs of the Bank and are prepared on a going concern basis.

• Risk identification and monitoring

Systems and procedures are in place to identify, assess, control and monitor the material risk types facing theBank as set out in the enterprise-wide risk framework. The Bank’s risk measurement and reporting systemsare designed to help ensure that material risks are captured with all the attributes necessary to support well-founded decisions, that those attributes are accurately assessed and that information is delivered in a timelymanner for those risks to be successfully managed and mitigated.

• Changes in market conditions/practices

Processes are in place to identify new risks arising from changes in market conditions/practices or customerbehaviours, which could expose the Bank to heightened risk of loss or reputational damage. The Bank employsa top and emerging risks framework, which contains an aggregate of all current and forward-looking risks andenables it to take action that either prevents these risk from materialising or to limit their impact.

• Responsibility for risk management

All employees are responsible for identifying and managing risk within the scope of their role as part of thethree lines of defence model, which is an activity-based model to delineate management accountabilities andresponsibilities for risk management and the control environment. The second line of defence sets the policyand guidelines for managing specific risk areas, provides advice and guidance in relation to the risk, andchallenges the first line of defence (the risk owners) on effective risk management.

• Strategic plans

Strategic plans are prepared for global businesses and global functions within the framework of the HSBCGroup’s overall strategy. Annual operating plans, informed by detailed analysis of risk appetite describing thetypes and quantum of risk that the Bank is prepared to take in executing its strategy, are prepared and adopted,and sets out the key business initiatives and the likely financial effects of those initiatives.

The effectiveness of the Bank’s system of risk management and internal control is reviewed regularly by the Board, theRisk Committee and the Audit Committee. The Risk Committee and the Audit Committee have received confirmationthat executive management has taken or is taking the necessary actions to remedy any failings or weaknesses identifiedthrough the operation of the framework of controls. The Audit Committee and Risk Committee have worked closely toensure there were procedures to manage risk and oversee the internal control framework.

14




REMUNERATION POLICY

The remuneration policy for the HSBC Group aims to reward success, not failure, and to be properly aligned with the

risk management framework and risk outcomes. In order to ensure alignment between remuneration and business

strategy, individual remuneration is determined through assessment of performance, delivered against both annual and

long-term objectives summarised in performance scorecards, as well as adherence to HSBC Values of being ‘open,

connected and dependable’ and acting with ‘courageous integrity’. Altogether, performance is judged not only on what

is achieved over the short and long term, but also on how it is achieved, as the latter contributes to the sustainability of

the organisation. The financial and non-financial measures incorporated in the annual and long-term scorecards are

carefully considered to ensure alignment with the long-term strategy of the HSBC Group.

The Bank has fully adopted the remuneration policy of HSBC Holdings plc. Please refer to the HSBC remuneration

practices and governance at http://www.hsbc.com/our-approach/remuneration for more details of the governance

structure and the remuneration strategy of the HSBC Group.

In recognition to the local regulations, the materiality of definition needs to be taken into consideration in ensuring a

robust corporate governance framework has been duly applied for the Bank. Further reviews will be conducted to ensure

continued adherence to the underlying principles of the local regulations.

RATING BY EXTERNAL RATING AGENCIES

Details of the Bank’s ratings are as follows:

Rating Agency Date Rating Classification

Ratings

Received

RAM Ratings Services Berhad June 2019 • Long term AAA

• Short term P1

• Multi-Currency Sukuk Programme

• Outlook

AAA

Stable

15



DIRECTORS’ REPORT

The Directors hereby submit their report and the audited financial statements of HSBC Amanah Malaysia Berhad (theBank) for the financial year ended 31 December 2019.

DIRECTORS

The Directors in office during the financial year and during the period from the end of the financial year to the date of

the report are:

• Datuk Kamaruddin bin Taib

• Stuart Paterson Milne

• Mukhtar Malik Hussain

• Adil Ahmad

• Lee Choo Hock [1]

• Albert Quah Chei Jin

• Ho Chai Huey

In accordance with Rule 21.6 of the Constitution, all Directors shall retire from the Board at the forthcoming Annual

General Meeting and, being eligible, offer themselves for re-election.

[1] Re-designated as Non-Independent Non-Executive Director on 30 May 2019. He was previously an Independent Non-Executive

Director.

PRINCIPAL ACTIVITIES

The principal activities of the Bank are Islamic banking business and related financial services. There have been no

significant changes in these activities during the financial year.

FINANCIAL RESULTS

Profit for the financial year attributable to the owner of the Bank

RM’000

Profit before tax 229,390

Tax expense (41,569)

Profit after tax 187,821

RESERVES AND PROVISIONS

There were no material transfers to or from reserves or provisions during the financial year other than those disclosed

in the financial statements.

ISSUE OF SHARES AND DEBENTURES

There were no issues of shares or debentures during the financial year under review.

16



DIRECTORS’ REPORT (Cont’d)

DIRECTORS’ BENEFITS

Since the end of the previous financial year, no Director has received or become entitled to receive a benefit (other thanthe benefits shown under Directors’ Remuneration) by reason of a contract made by the Bank or by a related corporationwith the Director or with a firm of which the Director is a member, or with a company in which the Director has asubstantial financial interest.

Neither during nor at the end of the financial year was the Bank a party to any arrangements whose object was to enablethe Directors to acquire benefits by means of the acquisition of shares in, or debentures of, the Bank or any other bodycorporate, except for:

(i) Directors who were granted the option to subscribe for shares in the ultimate holding company, HSBC

Holdings plc, under Executive/Savings-Related Share Option Schemes at prices and terms as determined by

the schemes, and

(ii) Directors who were conditionally awarded shares of the ultimate holding company, HSBC Holdings plc, under

its Restricted Share Plan/HSBC Share Plan.

DIRECTORS’ INTERESTS IN SHARES OR DEBENTURES

According to the Register of Directors’ Shareholdings required to be kept under Section 59 of the Companies Act 2016,none of the Directors who held office at the end of the financial year held any shares or debentures in the Bank or itsholding company or subsidiaries of the holding company during the financial year except as follows:

Shares

held at

1.1.2019

Shares issued

during the

year [2]

Shares vested

during the

year

Shares

held at

31.12.2019

HSBC Holdings plc

HSBC Share Plan

Mukhtar Malik Hussain 240,174 109,606 (169,537) 180,243

Stuart Paterson Milne [1] 103,344 34,064 (48,026) 89,382

[1] Including the interest of spouse[2] Including scrip dividends.

None of the other Directors holding office at 31 December 2019 had any interest in the ordinary shares and options

over shares of the Bank and of its related corporations during the financial year.

Number of Ordinary Shares

As at

1.1.2019 Acquired Disposed

As at

31.12.2019

HSBC Holdings plc

Ordinary shares of USD0.50

Mukhtar Malik Hussain 1,455,407 161,508 - 1,616,915

Stuart Paterson Milne [1] 206,514 82,802 (38,146) 251,170

Adil Ahmad 3,200 - - 3,200

Number of Shares

17




DIVIDENDS

Since the end of the previous financial year the Bank paid a final dividend of RM0.40 per share, amounting to net

dividend payment of RM40 million in respect of the financial year ended 31 December 2018. The dividend was paid

on 26 April 2019.

The Directors recommend the payment of a final dividend of RM0.50 per share, amounting to net dividend payment ofRM50 million in respect of the financial year ended 31 December 2019. This dividend will be recognised in thesubsequent financial year upon approval by the owner of the Bank.

HOLDING COMPANIES

The Directors regard HSBC Bank Malaysia Berhad, a company incorporated in Malaysia, and HSBC Holdings plc, a

company incorporated in United Kingdom, as the immediate and ultimate holding companies of the Bank respectively.

OTHER STATUTORY INFORMATION

Before the financial statements of the Bank were prepared, the Directors took reasonable steps:

i) to ascertain that proper action had been taken in relation to the writing off of bad debts and the making of

provision for doubtful debts and satisfied themselves that all known bad debts had been written off and that

adequate provision had been made for doubtful debts; and

ii) to ensure that any current assets which were unlikely to be realised in the ordinary course of business including

the values of current assets as shown in the accounting records of the Bank had been written down to an amount

which the current assets might be expected so to realise.

At the date of this report, the Directors are not aware of any circumstances:

i) which would render the amount written off for bad debts, or the amount of the provision for doubtful debts

inadequate to any substantial extent, or

ii) which would render the values attributed to current assets in the financial statements of the Bank misleading,

or

iii) which have arisen which would render adherence to the existing method of valuation of assets or liabilities of

the Bank misleading or inappropriate

At the date of this report, there does not exist:

i) any charge on the assets of the Bank which has arisen since the end of the financial year which secures the

liabilities of any other person, or

ii) any contingent liability in respect of the Bank which has arisen since the end of the financial year.

No contingent liability or other liability of the Bank has become enforceable, or is likely to become enforceable within

the period of twelve months after the end of the financial year which, in the opinion of the Directors, will or may affect

the ability of the Bank to meet their obligations as and when they fall due.

18




OTHER STATUTORY INFORMATION (Cont’d)

At the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or thefinancial statements of the Bank which would render any amount stated in the respective financial statementsmisleading.

In the opinion of the Directors:

i) the results of the operations of the Bank during the financial year were not substantially affected by any item,transaction or event of a material and unusual nature; and

ii) there has not arisen in the interval between the end of the financial year and the date of this report any item,transaction or event of a material and unusual nature likely to affect substantially the results of the operations ofthe Bank for the financial year in which this report is made.

SIGNIFICANT AND SUBSEQUENT EVENTS

There were no significant events and events subsequent to the date of the statement of financial position that requiredisclosure or adjustment to the audited financial statements.

SUBSIDIARIES

The Bank does not have any subsidiary company.

ZAKAT OBLIGATION

The Bank is not obliged to pay zakat for the financial year ended 31 December 2019.

DIRECTORS’ REMUNERATION

Details of Directors’ remuneration are set out in Note 35(b) to the financial statements.

AUDITORS’ REMUNERATION

Details of auditors’ remuneration are set out in Note 32 to the financial statements.

19

HSBC AMANAH MALAYSIA BERHAD

(Company No. 200801006421 (807705-X))



Performance Review, Strategy and Outlook

Performance Review

The Bank recorded a higher profit before tax of RM229.4 million for the financial year ended 31 December 2019, an

increase of RM17.8 million compared to previous financial year.

The higher profit was contributed by net income before impairment of RM550.0 million, an increase of RM13.5 million,

mainly due to higher finance income earned from financial assets designated at fair value through other comprehensive

income and deposit placements with financial institutions.

The Bank continues to place high emphasis in managing its operating expenses to ensure that the resources were spent

in a sustainable manner. The Bank is committed to invest in people to support its growth aspiration and control agenda.

Total assets size at 31 December 2019 stood at RM21.2 billion, RM0.9 billion or 4.4% higher compared against 31

December 2018 (RM20.3 billion). The Bank's capital and liquidity ratios continue to remain strong and well above the

regulatory requirements.

Business Strategy during the Year 2019

During 2019, the Bank have largely focused its business strategy on sustainable growth, risk management, efficiency

and streamlining, as well as offering innovative products and digital service solution to its clients.

In the retail business, the Retail Banking and Wealth Management (RBWM) focused its customer growth in three key

customer segments primarily in Premier, Advance and the Retail Business Banking while maintaining balanced risk

measures across its processes. New products and propositions were launched to meet different customer needs and

widen our product based. The prominent ones are HSBC Fusion, which provides a new and unique solution to both the

small businesses and its owners, and HSBC Everyday Global Account, which is a transactional multi-currency account

where customers open their accounts in MYR and get automatic access to various foreign currencies. Customers’

growth remain strong, and market share in cards and mutual funds continue to trend upwards.

Commercial Banking (CMB) continued to deliver its strategy to position HSBC Malaysia as a leading international

bank, assisting local corporates to expand their operations overseas, and thereby support foreign direct investment into

Malaysia. Strong growth was recorded across key corridors in 2019, in particular ASEAN and China, as evidenced by

robust revenue uplift in both ASEAN outbound and China inbound revenue. From the digital front, CMB has

successfully launched the first of its kind HSBCnet Trade Transaction Tracker, which enables customers to track real-

time status of trade transactions quickly and easily. CMB also implemented a Supply Chain Finance Platform to enhance

the digital trade capabilities in the emerging market of structured trade. In addition, there have been on-going efforts in

the commercialisation of digital tools and streamlining initiatives to simplify processes and improvements in customer

journeys.

Global Banking & Markets (GBM) also continued to seize advantage of its leadership and expertise in the debt capital

to secure key deals that yielded ancillary income and opportunities. Collaboration with other HSBC entities continued

to capture key growth opportunities in ASEAN and Belt and Road Initiative (BRI) corridors.

HSBC Malaysia’s strong financial position is also recognised by external parties including RAM Ratings Services

Berhad, which in 2019 reaffirmed the Bank’s long term and short term ratings of AAA and P1 ratings respectively. The

Bank also continued to maintain its market leader position in various segments, evident by the numerous awards that

the Bank won in 2019.

Corporate social responsibility continues to be a key focus area of HSBC. In 2019, the Bank continued to focus on three

main pillars which include developing Future Skills, Sustainable Network & Entrepreneurship and Sustainable Finance.

20


(Company No. 200801006421 (807705-X))



Performance review, Strategy and Outlook (Cont’d)

Business Strategy during the Year 2019 (Cont’d)

In addition the Bank aspires to support HSBC Group’s sustainability agenda which is also in line with Bank Negara’s

Value Based Intermediation (VBI). VBI is an initiative which aims to encourage banks to generate positive and

sustainable impact to the economy, community and environment through practices, conduct and offerings consistent

with shareholder’s sustainable returns and long term interests. In 2019, the Bank was awarded The Islamic Deal of the

Year, The Best Deal in Malaysia, The Best Sukuk, and The Most Innovative Deal by The Asset Triple A Islamic Finance

Awards for the issuance of 500 million ringgit United Nations Sustainable Development Goals (SDG) Sukuk, whereby

the proceeds will be utilised to finance eligible businesses and projects in accordance with the HSBC SDG Bond

Framework. The Bank will continue to explore different opportunities to ensure commitment towards the VBI agenda.

Outlook For 2020

For 2019, the Malaysian economy expanded annually by 4.3% (2018: 4.7%). Headline inflation was lower at 1.0%

during 4Q 2019, mainly reflecting the lapse in the impact from sales and services tax (SST) implementation.

Going into 2020, the outlook of the global economy remains uncertain due to the ongoing coronavirus outbreak,

outcome of various trade negotiations, geopolitical risks, weaker-than-expected growth of major trading countries and

heightened volatility in the financial markets.

Amid the challenging environment, the growth in the Malaysian economy is expected to gradually improve in 2020

with continued support from household spending and supportive monetary and fiscal policy changes. To secure the

growth trajectory amid price stability, Bank Negara Malaysia, has on 22 January 2020, reduced the Overnight Policy

Rate (OPR) by 25 basis points to 2.75%. This is in addition to the previous 25-basis point cut in May 2019.

Overall investment activity in 2020 is expected to record a modest recovery, underpinned by ongoing and new projects,

both in the public and private sectors. The Finance Ministry, during Budget for 2020, has also forecasted the GDP for

2020 to grow by 4.8%.

In 2020, headline inflation is expected to average higher but remain modest. The trajectory of headline inflation will

continue to be primarily dependent on global crude oil prices and the timing of the lifting of the domestic retail fuel

price ceilings, but is expected to be broadly stable. The Ringgit, consistent with most regional currencies, has generally

depreciated against US dollar during the year, and will continue to be affected by external factors.

From funding perspective, the banking system liquidity is expected to remain robust and sufficient to facilitate financial

intermediation despite continuous strong competition among banks for deposits especially in view of Basel III’s Net

Stable Funding Ratio requirement coming into effect on 1 July 2020. BNM has also reduced the Statutory Reserve

Requirement (SRR) Ratio from 3.5% to 3.0% effective from 16 November 2019 in an effort to maintain sufficient

liquidity in the domestic financial system.

Separately, the much awaited digital banking licensing framework has been issued by BNM for industry consultation

in late December 2019. BNM is expected to finalise the policy in first half of 2020 and up to five digital bank licences

is expected to be issued to qualified applicants to conduct either conventional or Islamic banking business in Malaysia.

Many local players are already eyeing the licence following from the issuance of digital banking licence in Singapore

and Hong Kong, along with the successful set-up of a few digital banks in China, Australia and South Korea. Non-bank

players from the FinTech sector are expected to join the crowd, leveraging on their well-established e-payment and e-

wallet platforms. In time to come, the banking industry will face an unprecedented, new stream of competitors. Digital

banking will definitely change the banking landscape and may prove to be one of the biggest disruption that the banking

industry has seen in decades.

In attune to the rapid technology development, the Bank is also gearing up its technology frontier by enhancing digital

capabilities for mobile and internet banking to improve customer service and experience. In addition, the Bank will

continue to deepen the relationship with existing customers and also to penetrate new customer segments including the

tech-savvy group.

21


(Company No. 200801006421 (807705-X))



Performance review, Strategy and Outlook (Cont’d)

Outlook For 2020 (Cont’d)

The Bank will also continue to leverage on HSBC Group’s international network and capabilities to capture cross-

border opportunities in the ASEAN and Belt and Road Initiative (BRI) corridors, and grow its business by leveraging

on government schemes, providing customers with structured banking solutions and sustainable financing, besides

maintaining its commitment towards the VBI agenda.

In the spirit of putting customer’s interest first and doing the right things, the Bank will continue its journey in building

the right culture for the organisation, providing continuous training and staff development, and gaining efficiency as it

progress.

Awards won during the financial year:

1. Islamic deal of the year for HSBC Amanah’s 500 million ringgit United Nations sustainable development

goals sukuk - The Asset Triple A Islamic Finance Awards 2019

2. Best deal, Malaysia for HSBC Amanah’s 500 million ringgit United Nations sustainable development goals

sukuk - The Asset Triple A Islamic Finance Awards 2019

3. Best sukuk for HSBC Amanah’s 500 million ringgit United Nations sustainable development goals sukuk -

The Asset Triple A Islamic Finance Awards 2019

4. Most innovative deal for HSBC Amanah’s 500 million ringgit United Nations sustainable development

goals sukuk - The Asset Triple A Islamic Finance Awards 2019

5. Best Trade Finance Bank - The Asset Triple A Islamic Finance Awards 2019

6. Best Corporate Sukuk for Tenaga Nasional’s US$750 million sukuk wakala – The Asset Triple A Islamic

Finance Awards 2019

7. Largest Payment Volume Islamic Credit Card – Visa Malaysia Bank Awards 2018/2019

8. Best Country Deal Award for Serba Dinamik’s US$300 million 3-year high yield sukuk - FinanceAsia

Achievement Awards 2019

22




AUDITORS

The auditors, PricewaterhouseCoopers PLT (LLP0014401-LCA & AF 1146), have expressed their willingness to accept

re-appointment as auditors. A resolution to re-appoint PricewaterhouseCoopers PLT as auditor of the Bank will be

proposed at the forthcoming Annual General Meeting.

This report was approved by the Board of Directors on 4 February 2020.

Signed on behalf of the Directors in accordance with a resolution of the Directors:

…………………….……………….…..…. …………………….……………….…..….

STUART PATERSON MILNE ALBERT QUAH CHEI JINDirector Director

Kuala Lumpur, Malaysia

4 February 2020

23



STATEMENT BY DIRECTORS PURSUANT TO SECTION 251(2) OF THE COMPANIES ACT 2016

In the opinion of the Directors:

We, Stuart Paterson Milne and Albert Quah Chei Jin, being two of the Directors of HSBC Amanah Malaysia Berhad,

do hereby state that, in the opinion of the Directors, the accompanying financial statements set out on pages 32 to 140

are drawn up so as to give a true and fair view of the financial position of the Bank as at 31 December 2019 and financial

performance of the Bank for the financial year ended 31 December 2019 in accordance with the Malaysian Financial

Reporting Standards, International Financial Reporting Standards and the requirements of the Companies Act 2016 in

Malaysia.

Signed on behalf of the Board of Directors in accordance with a resolution of the Directors dated 4 February 2020.

…………………….……………….…..…. …………………….……………….…..….

STUART PATERSON MILNE ALBERT QUAH CHEI JINDirector Director


4 February 2020

24



STATUTORY DECLARATION PURSUANT TO SECTION 251(1) OF THE COMPANIES ACT 2016

I, Wong Yeong Wai, being the officer primarily responsible for the financial management of HSBC Amanah Malaysia

Berhad, do solemnly and sincerely declare that, to the best of my knowledge and belief, the financial statements set out

on pages 32 to 140 are correct, and I make this solemn declaration conscientiously believing the same to be true, and

by virtue of the provisions of the Statutory Declarations Act 1960.

Subscribed and solemnly declared by the abovenamed

at Kuala Lumpur, Malaysia on 4 February 2020.

....................................................................

WONG YEONG WAI

BEFORE ME:

…………………………………………….

Signature of Commissioner for Oaths

25



SHARIAH COMMITTEE’S REPORT

In the name of Allah, the most Beneficent, the most Merciful.

Praise be to Allah, the Lord of the Worlds and peace and blessings be upon our Prophet Muhammad, his family and

companions.

Assalamu ‘Alaikum Warahmatullahi Wabarakatuh

In carrying out the roles and responsibilities as Shariah Committee of HSBC Amanah Malaysia Berhad as prescribed

in the Shariah Governance Framework for Islamic Financial Institutions issued by Bank Negara Malaysia, the Bank’s

Shariah Governance Policy as well as the Bank’s Committee’s Terms of Reference, we hereby submit the following

report for the financial year ended 31 December 2019:

1. We have conducted eight (8) meetings for the whole year of 2019 in which the Shariah Committee members

have met the minimum attendance requirement of at least 75% of the Shariah committee meetings and

reviewed the principles and the contracts relating to the transactions and applications introduced by the Bank

during the financial year ended 31 December 2019 to ensure conformity with Shariah requirements.

2. We have performed an oversight role through the Shariah review and Shariah audit functions in ensuring the

Bank has complied with the Shariah principles and rulings issued by us and the Shariah Advisory Council of

Bank Negara Malaysia.

3. The management of the Bank is responsible for ensuring that the financial institution conducts its business in

accordance with Shariah principles. It is our responsibility to form an independent opinion, based on our

review of the operations of the Bank, and to report to you.

4. We have assessed the work carried out by Shariah Department and its effectiveness to implement the Shariah

Governance Framework which included pre and post examination, on a test basis, each type of transaction

across business lines, the relevant documentations and procedures adopted and/or entered into by the Bank.

5. In performing our duties, we planned and performed our review and had obtained all the information and

explanations which we considered indispensable and necessary in order to provide us with satisfactory

evidence to arrive at sound Shariah decisions and to give reasonable assurance that the Bank has complied

with Shariah requirements and has not violated the Shariah rules and principles based on the evidences which

have been disclosed and tabulated before us.

On that note, we, being the members of the Shariah Committee of HSBC Amanah Malaysia Berhad, do hereby confirm

that, with the exception of identified breaches that are being remedied, in our opinion:

(a) the contracts, transactions, dealings entered into by the Bank during the financial year ended 31 December

2019 that have been reviewed by us, are in compliance with Shariah rules and principles;

(b) the allocation of profit and charging of losses relating to the Investment Agency Account and Syndicated

Investment Account for Financing conform to the basis that had been approved by us in accordance with

Shariah principles;

(c) all earnings that have either been realised from sources or by means prohibited by the Shariah principles have

been considered for disposal to charitable causes where remedial actions have been put in place; and

(d) the Bank is not required to pay zakat for the financial year ended 31 December 2019 because its shareholder

has no obligation to pay zakat.

26



SHARIAH COMMITTEE’S REPORT (Cont’d)

We, the members of the Shariah Committee of HSBC Amanah Malaysia Berhad, do hereby confirm that with the

exception of identified breaches that are being remedied, the operations of the Bank for the financial year ended 31

December 2019 have been conducted in conformity with the Shariah principles.

We pray to Allah the Almighty to grant us success and the path of continued guidance.

Wassalamu ‘Alaikum Warahmatullahi Wabarakatuh

Chairman of the Shariah Committee …………………………………………….

Asst Prof Dr Ziyaad Mahomed (Chairman)

Member of the Shariah Committee …………………………………………….

Dr Aida binti Othman


Dr Khairul Anuar bin Ahmad


Prof Dr Younes Soualhi


Dr Mohamed Ashraf bin Mohamed Iqbal


4 February 2020

27

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBER OF HSBC AMANAH MALAYSIA BERHAD


(Company No. 200801006421 (807705-X))

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS

Our opinion

In our opinion, the financial statements of HSBC Amanah Malaysia Berhad (“the Bank”) give a true and fair view of

the financial position of the Bank as at 31 December 2019, and of its financial performance and its cash flows for the

year then ended in accordance with Malaysian Financial Reporting Standards, International Financial Reporting

Standards and the requirements of the Companies Act 2016 in Malaysia.

What we have audited

We have audited the financial statements of the Bank, which comprise the statement of financial position as at 31

December 2019 of the Bank, and the statement of profit or loss, statement of comprehensive income, statement ofchanges in equity and statement of cash flows of the Bank for the year then ended, and notes to the financial

statements, including a summary of significant accounting policies, as set out on pages 32 to 140.

Basis for opinion

We conducted our audit in accordance with approved standards on auditing in Malaysia and International Standards on

Auditing. Our responsibilities under those standards are further described in the “Auditors’ responsibilities for the audit

of the financial statements” section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence and other ethical responsibilities

We are independent of the Bank in accordance with the By-Laws (on Professional Ethics, Conduct and Practice) of the

Malaysian Institute of Accountants (“By-Laws”) and the International Ethics Standards Board for Accountants’ Code

of Ethics for Professional Accountants (“IESBA Code”), and we have fulfilled our other ethical responsibilities in

accordance with the By-Laws and the IESBA Code.

28

INDEPENDENT AUDITORS’ REPORT (CONT’D)

TO THE MEMBER OF HSBC AMANAH MALAYSIA BERHAD (CONT’D)


(Company No. 200801006421 (807705-X))

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONT’D)

Information other than the financial statements and auditors’ report thereon

The Directors of the Bank are responsible for the other information. The other information comprises the list of Board

of Directors, Corporate Governance Disclosures, Rating by External Rating Agencies, Directors’ Report and Shariah

Committee’s Report, but does not include the financial statements of the Bank and our auditors’ report thereon.

Our opinion on the financial statements of the Bank does not cover the other information and we do not express any

form of assurance conclusion thereon.

In connection with our audit of the financial statements of the Bank, our responsibility is to read the other information

and, in doing so, consider whether the other information is materially inconsistent with the financial statements of the

Bank or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information,

we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Directors for the financial statements

The Directors of the Bank are responsible for the preparation of the financial statements of the Bank that give a true

and fair view in accordance with Malaysian Financial Reporting Standards, International Financial Reporting Standards

and the requirements of the Companies Act 2016 in Malaysia. The Directors are also responsible for such internal

control as the Directors determine is necessary to enable the preparation of financial statements of the Bank that are

free from material misstatement, whether due to fraud or error.

In preparing the financial statements of the Bank, the Directors are responsible for assessing the Bank’s ability to

continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern

basis of accounting unless the Directors either intend to liquidate the Bank or to cease operations, or have no realistic

alternative but to do so.

29

INDEPENDENT AUDITORS’ REPORT (CONT’D)

TO THE MEMBER OF HSBC AMANAH MALAYSIA BERHAD (CONT’D)


(Company No. 200801006421 (807705-X))


Auditors’ responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements of the Bank as a whole arefree from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance withapproved standards on auditing in Malaysia and International Standards on Auditing will always detect a materialmisstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually orin the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis ofthese financial statements.

As part of an audit in accordance with approved standards on auditing in Malaysia and International Standards onAuditing, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

(a) Identify and assess the risks of material misstatement of the financial statements of the Bank, whether due tofraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that issufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatementresulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,intentional omissions, misrepresentations, or the override of internal control.

(b) Obtain an understanding of internal control relevant to the audit in order to design audit procedures that areappropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of theBank’s internal control.

(c) Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates andrelated disclosures made by the Directors.

(d) Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based onthe audit evidence obtained, whether a material uncertainty exists related to events or conditions that may castsignificant doubt on the Bank’s ability to continue as a going concern. If we conclude that a materialuncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in thefinancial statements of the Bank or, if such disclosures are inadequate, to modify our opinion. Our conclusionsare based on the audit evidence obtained up to the date of our auditors’ report. However, future events orconditions may cause the Bank to cease to continue as a going concern.

(e) Evaluate the overall presentation, structure and content of the financial statements of the Bank, including thedisclosures, and whether the financial statements of the Bank represents the underlying transactions and eventsin a manner that achieves fair presentation.

We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit andsignificant audit findings, including any significant deficiencies in internal control that we identify during our audit.

30

INDEPENDENT AUDITORS’ REPORT (CONT’D)TO THE MEMBER OF HSBC AMANAH MALAYSIA BERHAD (CONT’D)(Incorporated in Malaysia)(Company No. 200801006421 (807705-X))


OTHER MATTERS

This report is made solely to the member of the Bank, as a body, in accordance with Section 266 of the Companies Act2016 in Malaysia and for no other purpose. We do not assume responsibility to any other person for the content of thisreport.

PRICEWATERHOUSECOOPERS PLT SOO HOO KHOON YEANLLP0014401-LCA & AF 1146 02682/10/2021 JChartered Accountants Chartered Accountant

Kuala Lumpur18 February 2020

31

31 Dec 2019 31 Dec 2018Note RM'000 RM'000

AssetsCash and short-term funds 8 4,781,964 2,804,494Deposits and placements with banks

and other financial institutions 9 139,153 -Financial investments at fair value through other

comprehensive income (FVOCI) 10 2,719,975 2,725,683Financing and advances 11 13,042,953 14,137,337Derivative financial assets 14 125,674 242,284Other assets 15 68,641 50,664Statutory deposits with Bank Negara Malaysia 16 329,662 364,662Equipment 17 7,101 6,868Deferred tax assets 19 23,908 17,363

Total assets 21,239,031 20,349,355

LiabilitiesDeposits from customers 20 13,320,333 11,444,577Deposits and placements from banks

and other financial institutions 21 2,339,954 3,299,964Structured liabilities designated at fair value

through profit or loss (FVTPL) 22 1,295,358 884,877Bills payable 22,036 18,594Derivative financial liabilities 14 79,721 227,330Other liabilities 23 343,396 270,960Provision for taxation 12,007 29,520Multi-Currency Sukuk Programme 24 1,265,929 1,755,281Subordinated Commodity Murabahah Financing 25 589,612 595,987

Total liabilities 19,268,346 18,527,090

EquityShare capital 26 660,000 660,000Reserves 27 1,310,685 1,162,265

Total equity attributable to owner of the Bank 1,970,685 1,822,265

Total liabilities and equity 21,239,031 20,349,355

Restricted investment accounts [1]4,144,225 4,175,818

Total Islamic Banking asset [1]25,383,256 24,525,173

Commitments and contingencies 38 20,854,027 23,162,908

[1]

The accompanying notes form an integral part of the financial statements.



The disclosure is in accordance with the requirements of Bank Negara Malaysia's Guideline on Financial Reporting for

Islamic Banking Institutions dated 27 September 2019.

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019

32

31 Dec 2019 31 Dec 2018Note RM'000 RM'000

(Restated)

Income derived from investment of

depositors' funds and others 28 826,138 823,353Income derived from investment of

shareholder's funds 29 162,451 147,435Impairment allowance/provision 30 (75,483) (69,444)

Total distributable income 913,106 901,344

Income attributable to depositors 31 (438,635) (434,346)

Total net income 474,471 466,998

Operating expenses 32 (245,081) (255,429)

Profit before tax 229,390 211,569

Tax expense 33 (41,569) (48,869)

Profit for the financial year 187,821 162,700




STATEMENT OF PROFIT OR LOSS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2019

Nine Months Ended

33

31 Dec 2019 31 Dec 2018Note RM'000 RM'000

(Restated)Other comprehensive income/(expense)Items that will not be reclassified to profit or loss

Own credit reserves:

Change in fair value (6,934) (4,859)

Income tax effect 1,664 1,166

Items that will subsequently be reclassified to

profit or loss when specific conditions are met:

Fair value through other comprehensive income/(expense) reserve:Change in fair value 16,285 (287)Net amount transferred from profit or loss (8,653) 482Impairment charges 14 25Income tax effect (1,831) (46)

Other comprehensive income/(expense) forthe financial year, net of tax 545 (3,519)

Total comprehensive income for the financial year 188,366 159,181

Profit attributable to the owner of the Bank 187,821 162,700Total comprehensive income attributable to the

owner of the Bank 188,366 159,181

Basic earnings per RM0.50 ordinary share 34 187.8 sen 162.7 sen

Dividends per RM0.50 ordinary share (net)- final dividend paid in respect of the year 40.0 sen 10.0 sen




STATEMENT OF COMPREHENSIVE INCOME FOR THEFINANCIAL YEAR ENDED 31 DECEMBER 2019

34

Distributable

Own CapitalShare credit contribution Regulatory Retained Total

capital reserve reserve reserve profitsRM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

2019

Balance at 1 January 660,000 479 (2,987) 499 91,100 1,073,174 1,822,265

Total comprehensive income for the financial year

Profit for the financial year - - - - - 187,821 187,821

Other comprehensive income, net of tax

FVOCI reserve/Own Credit reserve

Net change in fair value - 12,377 (5,270) - - - 7,107

Net amount transferred to profit or loss - (6,576) - - - - (6,576)

Impairment charges - 14 - - - - 14

Total other comprehensive income - 5,815 (5,270) - - - 545

Total comprehensive income for the financial year - 5,815 (5,270) - - 187,821 188,366

Net change in regulatory reserves - - - - (38,000) 38,000 -

Transactions with the owner, recorded directly in equity

Share based payment transactions - - - 38 - 16 54

Dividends paid to owner - 2018 final - - - - - (40,000) (40,000)Balance at 31 December 660,000 6,294 (8,257) 537 53,100 1,259,011 1,970,685



STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2019


FVOCI

reserve

Non-distributable

35

Distributable

Own CapitalShare credit contribution Regulatory Retained Total

capital reserve reserve reserve profitsRM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

2018Balance at 1 January- As previously stated 660,000 179 - 230 408 34,000 921,511 1,616,328- Impact on transition to MFRS 9 - (179) 305 476 - 15,960 40,090 56,652- As restated 660,000 - 305 706 408 49,960 961,601 1,672,980

Total comprehensive income for the financial year

Profit for the financial year - - - - - - 162,700 162,700

Other comprehensive income, net of tax

FVOCI reserve/Own Credit reserve

Net change in fair value - - (217) (3,693) - - - (3,910)

Net amount transferred from profit or loss - - 366 - - - - 366

Impairment charges - - 25 - - - - 25

Total other comprehensive income - - 174 (3,693) - - - (3,519)

Total comprehensive income for the financial year - - 174 (3,693) - - 162,700 159,181

Net change in regulatory reserves - - - - - 41,140 (41,140) -

Transactions with the owner, recorded directly in equity

Share based payment transactions - - - - 91 - 13 104

Dividends paid to owner - 2017 final - - - - - - (10,000) (10,000)Balance at 31 December 660,000 - 479 (2,987) 499 91,100 1,073,174 1,822,265


(Company No. 200801006421 (807705-X))(Incorporated in Malaysia)

FVOCI

reserve


Non-distributable

STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2019 (Cont'd)

Available-for-

sale reserve

36

31 Dec 2019 31 Dec 2018RM'000 RM'000

Cash Flows from Operating ActivitiesProfit before income tax expense 229,390 211,569Adjustments for:

Equipment written off 3 1Unrealised losses/(gains) from dealing in foreign currency 529 (360)Unrealised (gains)/losses from revaluation of financial assets at FVTPL (2,080) 952Unrealised (gains)/losses from trading in derivatives (427) 1,983Allowance for impairment losses 123,815 110,427Share based payment transactions 728 187Depreciation of equipment 1,962 2,324Depreciation of Right-of-use assets 6,674 -Unrealised (gains)/losses of foreign exchange translation on subordinated

commodity murabahah financing (6,375) 12,389Net expenses on financial instruments fair value through profit or loss 39,395 16,081

Operating profit before changes in operating assets and liabilities 393,614 355,553

Decrease/(Increase) in operating assetsDeposits and placements with banks and other financial institutions (139,157) -Financing and advances 970,288 (788,596)Derivative financial assets 118,588 33,613Other assets (20,273) (11,509)Statutory deposits with Bank Negara Malaysia 35,000 (3,300)

Total decrease/(increase) in operating assets 964,446 (769,792)

(Decrease)/Increase in operating liabilitiesDeposits from customers 1,875,756 1,410,052Deposits and placements from banks and other financial institutions (960,010) (61,975)Structured liabilities designated at FVTPL 374,800 586,264Bills payable 3,442 1,916Derivative financial liabilities (147,609) (38,072)Other liabilities 169,453 (17,131)

Total increase in operating liabilities 1,315,832 1,881,054

Cash generated from operating activities 2,673,892 1,466,815Income tax paid (65,817) (37,242)

Net cash generated from operating activities 2,608,075 1,429,573


STATEMENT OF CASH FLOWS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2019

(Incorporated in Malaysia)(Company No. 200801006421 (807705-X))HSBC AMANAH MALAYSIA BERHAD

37

31 Dec 2019 31 Dec 2018RM'000 RM'000

Cash Flows from Investing ActivitiesPurchase of financial investments at fair value through other

comprehensive income (2,055,476) (1,285,897)Proceeds from disposal of equipment 30 -Proceeds from disposal of financial investments at fair value through

other comprehensive income 2,064,439 785,933Purchase of equipment (2,228) (3,673)

Net cash generated from/(used in) investing activities 6,765 (503,637)

Cash Flows from Financing ActivitiesIssuance of Multi-Currency Sukuk - 500,000Profits paid on Multi-Currency Sukuk Programme (70,024) (50,186)Profit paid on Subordinated Commodity Murabahah Financing (27,346) (27,175)Redemption of Multi-Currency Sukuk Programme (500,000) -Dividend paid (40,000) (10,000)

Net cash (used in)/generated form financing activities (637,370) 412,639

Net increase in Cash and Cash Equivalents 1,977,470 1,338,575Cash and Cash Equivalents at beginning of the financial year 2,804,494 1,465,919Cash and Cash Equivalents at end of the financial year 4,781,964 2,804,494

Analysis of Cash and Cash EquivalentsCash and short-term funds 4,781,964 2,804,494


STATEMENT OF CASH FLOWS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2019 (Cont'd)



38

Changes in liabilities arising from financing activities

At 1 January

Cash (outflow)/inflow

Foreign exchangeadjustment

Fair valuemovement Profit accrual At 31 December

RM'000 RM'000 RM'000 RM'000 RM'000 RM'0002019Multi-Currency Sukuk Programme 1,755,281 (500,000) - 10,648 - 1,265,929Subordinated Commodity Murabahah Financing 595,987 - (6,375) - - 589,612Other Liabilities of which:

Profits paid on Multi-Currency Sukuk Programme 18,175 (70,024) - - 65,573 13,724

Profits paid on Subordinated Commodity Murabahah Financing 307 (27,346) - - 27,320 281Dividend paid - (40,000) - - - -

2,369,750 (637,370) (6,375) 10,648 92,893 1,869,546

2018Multi-Currency Sukuk Programme 1,252,829 500,000 - 2,452 - 1,755,281Subordinated Commodity Murabahah Financing 583,598 - 12,389 - - 595,987Other Liabilities of which:

Profits paid on Multi-Currency Sukuk Programme 12,815 (50,186) - - 55,546 18,175

Profits paid on Subordinated Commodity Murabahah Financing 2,371 (27,175) - - 25,111 307Dividend paid - (10,000) - - - -

1,851,613 412,639 12,389 2,452 80,657 2,369,750




STATEMENT OF CASH FLOWS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2019 (Cont'd)

39

HSBC Amanah Malaysia Berhad200801006421 (807705-X)



NOTES TO THE FINANCIAL STATEMENTS

1 General Information

HSBC Amanah Malaysia Berhad (the Bank) is a licensed Islamic Bank under the Islamic Financial Services Act,2013. The principal activities of the Bank is Islamic banking and related financial services.

There were no significant changes in these activities during the financial year.

The Bank is a public limited liability company, incorporated and domiciled in Malaysia. The registered office ofthe Bank is located at 10th Floor, North Tower, 2, Leboh Ampang, 50100 Kuala Lumpur.

The immediate holding company and ultimate holding company during the financial year are HSBC BankMalaysia Berhad (HBMY) and HSBC Holdings Plc, respectively.

The financial statements were approved and authorised for issue by the Board of Directors on 4 February 2020.

2 Basis of Preparation

(a) Statement of compliance

The financial statements of the Bank has been prepared in accordance with the requirements of MalaysianFinancial Reporting Standards (MFRS), International Financial Reporting Standards, the requirements of theCompanies Act 2016 in Malaysia and BNM requirements on Shariah related disclosures.

(i) Standards and amendments to published standards that are effective

The amendments to published accounts that are effective and applicable to the Bank for the financial yearbeginning on 1 January 2019 are as follows:

• MFRS 16 ‘Leases’

• Amendments to MFRS 9 ‘Prepayment Features with Negative Compensation’

• Amendments to MFRS 128 ‘Long-term Interests in Associates and Joint Ventures’

• Amendments to MFRS 119 ‘Plan Amendment, Curtailment or Settlement’

• IC Interpretation 23 ‘Uncertainty over Income Tax Treatments’

• Annual Improvements to MFRSs 2015 – 2017 Cycle

The Bank has adopted MFRS 16 for the first time in the 2019 financial statements, which resulted in changes inaccounting policies. The detailed impact of changes in accounting policies for MFRS 16 are set out in Note 3.

The adoption of other amendments listed above did not have any impact on the current period or any prior periodand is not likely to affect future periods.

40


NOTES TO THE FINANCIAL STATEMENTS (Cont’d)

2 Basis of Preparation (Cont’d)

(a) Statement of compliance (Cont’d)

(ii) Standards early adopted by the Bank

The Bank elected to early adopt the Interest/Profit Rate Benchmark Reform (Amendments to MFRS 9 ‘FinancialInstruments’, MFRS 139 ‘Financial Instruments: Recognition and Measurement’ and MFRS 7 ‘FinancialInstruments: Disclosures’). Amendments to MFRS 9, MFRS 139 and MFRS 7 were issued in October 2019 thatmodify the specific hedge accounting requirements so that entities apply those hedge accounting requirementsassuming that the profit rate benchmark on which the hedged cash flows and cash flows of the hedging instrumentare based is not altered as a result of profit rate benchmark reform. These amendments apply from 1 January 2020with early adoption permitted. The Bank has adopted the amendments that apply to MFRS 139 from 1 January2019 and has made the additional disclosures as required by the amendments.

(iii) Standards and amendments to published standards have been issued but not yet effective

A number of new standards and amendments to standards and interpretations are effective for financial yearbeginning after 1 January 2020. None of these is expected to have a significant effect on the financial statementsof the Bank, except the following set out below:

• Amendments to MFRS 3 ‘Definition of a Business’ (effective 1 January 2020) revise the definition of abusiness. To be considered a business, an acquisition would have to include an input and a substantive processthat together significantly contribute to the ability to create outputs.

The amendments provide guidance to determine whether an input and a substantive process are present, includingsituation where an acquisition does not have outputs. To be a business without outputs, there will now need to bean organised workforce. It is also no longer necessary to assess whether market participants are capable ofreplacing missing elements or integrating the acquired activities and assets.

In addition, the revised definition of the term ‘outputs’ is narrower, focusses on goods or services provided tocustomers, generating investment returns and other income but excludes returns in the form of cost savings.

The amendments introduce an optional simplified assessment known as ‘concentration test’ that, if met, eliminatesthe need for further assessment. Under this concentration test, if substantially all of the fair value of gross assetsacquired is concentrated in a single identifiable asset (or a group of similar assets), the assets acquired would notrepresent a business.

The amendments shall be applied prospectively.

(b) Basis of measurement

The financial statements of the Bank has been prepared on the historical cost basis, except for the following assetsand liabilities as explained in their respective accounting policy notes:

• Structured liabilities• Financial investments• Derivatives and hedge accounting• Financial liabilities designated at fair value through profit or loss (FVTPL)

41



2 Basis of Preparation (Cont’d)

(c) Functional and presentation currency

These financial statements are presented in Ringgit Malaysia (RM), which is the Bank’s functional currency. Allfinancial information presented in RM has been rounded to the nearest thousand, unless otherwise stated.

(d) Use of estimates and judgments

The results of the Bank are sensitive to the accounting policies, assumptions and estimates that underlie thepreparation of the financial statements. The significant accounting policies are described in Note 4. Thepreparation of the financial statements in conformity with MFRSs requires management to make estimates andassumptions about future conditions. The use of available information and the application of judgment are inherentin the formation of estimates; actual results in the future may differ from estimates upon which financialinformation is prepared.

Management believes that the Bank’s critical accounting policies where judgment is necessarily applied are thosewhich relate to impairment of financing and advances and the valuation of financial instruments (refer Note 7).There are no other significant areas of estimation uncertainty and critical judgments in applying accountingpolicies that have significant effect on the amounts recognised in the financial statements other than thosedisclosed above.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates arerecognised in the period in which the estimate is revised and in any future periods affected.

42



3 Changes in accounting policies

Adoption of MFRS 16 ‘Lease’

On 1 January 2019, the Bank changed its accounting policies on leases upon the adoption of MFRS16, which supersedesMFRS 117 ‘Leases’. The Bank has elected to use the simplified retrospective transition method and to apply a numberof practical expedients as provided in MFRS 16.

On adoption of MFRS 16, the Bank recognised lease liabilities in relation to leases which had previously been classifiedas “operating leases” under the principles of MFRS 117. These liabilities were measured at the present value of theremaining lease payments, discounted at the lessee’s incremental borrowing rate as at 1 January 2019. The associatedright-of-use (ROU) assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaidor accrued lease payments or provisions for onerous leases recognised on balance sheet at 31 December 2018.

In addition, the following practical expedients permitted by the standard were applied:• Reliance was placed on previous assessments on whether leases were onerous;• Operating leases with a remaining lease term of less than 12 months as at 1 January 2019 were treated as short-term

leases; and• Initial direct costs were not included in the measurement of ROU assets for leases previously accounted for as

operating leases.

The differences between MFRS 16 and MFRS 117 are summarised below:

• Under MFRS 117, leases were classified as either finance or operating leases. Payments made under operating leaseswere charged to profit or loss on a straight-line basis over the period of the lease.

• Under the new MFRS 16:- Leases are recognised as an ROU asset and a corresponding liability at the date at which the leased asset is

made available for use. Lease payments are allocated between the lease liability and finance cost. The financecost is charged to the profit or loss over the lease term so as to produce a constant period profit rate on theremaining balance of the liability. The ROU asset is depreciated over the shorter of the ROU asset’s usefuleconomic life and the lease term on a straight-line basis.

- In determining lease term, the Bank considers all facts and circumstances that create an economic incentive toexercise an extension option or not exercise a termination option over the planning horizon of five years.

- In general, it is not expected that the discount rate implicit in the lease is available so the lessee’s incrementalborrowing rate is used. This is the rate that the lessee would have to pay to borrow the funds necessary toobtain an asset of a similar value in a similar economic environment with similar terms and conditions. Therates are determined for each economic environment in which the Bank operates by adjusting swap rates withfunding spreads (own credit spread) and cross-currency basis where appropriate.

Under the simplified retrospective transition method, the 2018 comparative information was not restated and thecumulative effects of initial application of MFRS 16 where the Bank is a lessee were recognised as an adjustment to theopening balance of retained earnings as at 1 January 2019. The comparative information continued to be reported underthe previous accounting policies governed under MFRS 117 ‘Leases’ and IC Interpretation 4 ‘Determining whether anArrangement Contains a Lease’.

As at 1 January 2019, the change in accounting policies has affected the following items:

Other assets - increase by RM31,733,000Other liabilities - increase by RM31,733,000

There is no impact on retained profits and deferred tax of the Bank arising from the adoption of MFRS 16.

43

HSBC Amanah Malaysia Berhad

200801006421 (807705-X)

NOTES TO THE FINANCIAL STATEMENTS (Cont'd)

3 Changes in accounting policies (Cont'd)

Adoption of MFRS 16 'Lease (Cont'd)

RM'000

Operating lease commitments disclosed as at 31 December 2018 13,404Discounted using incremental borrowing rate (610)Less: short-term leases recognised on a straight-line basis as expense (203)Add: adjustments as a result of a different treatment on extension and termination options 19,142Lease liability recognised as at 1 January 2019 31,733

Of which:- Current lease liabilities 6,020- Non-current lease liabilities 25,713

31,733

The reconciliation between the operating lease commitments disclosed applying MFRS 117 at 31December 2018 to the lease liabilities recognised at 1 January 2019 is as follows:

44



4 Significant Accounting Policies

The accounting policies set out below have been applied consistently to the periods presented in these financialstatements and have been applied consistently by the Bank.

(a) Foreign Currencies

Transactions in foreign currencies are translated to the functional currency at exchange rates at the dates of thetransactions.

Monetary assets and liabilities denominated in foreign currencies at the reporting period are retranslated to thefunctional currency at the exchange rate at that date.

Non-monetary assets and liabilities denominated in foreign currencies are not retranslated at the end of the reportingdate except for those that are measured at fair value are retranslated to the functional currency at the exchange rateat the date that the fair value was determined.

Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arisingon the retranslation of FVOCI equity instruments or a financial instrument designated as a hedge of currency risk,which are recognised in other comprehensive income.

(b) Financing Income and Expenses

Financing income and expenses for all financial instruments of the Bank, except those classified as financialinstruments designated at fair value through profit or loss (FVTPL) are recognised in ‘finance income’ and ‘incomeattributable to depositors’ in the statement of profit or loss on an accrual basis using the effective profit rate methodin accordance with the principles of Shariah. The effective profit rate method is a way of calculating the amortisedcost of a financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocatingthe Islamic financing income or expense over the relevant period.

The effective profit rate is the rate that exactly discounts the estimated future cash payments or receipts through theexpected life of the financial instruments, or where appropriate, a shorter period, to the net carrying amount of thefinancial asset or liability. When calculating the effective profit rate, the Bank estimates cash flows considering allcontractual terms of the financial instrument but not future credit losses.

The calculation of the effective profit rate includes all amounts paid or received by the Bank that are an integral partof the effective profit rate, including transaction costs and all other premiums or discounts.

Profit on impaired financial assets of the Bank is recognised using the rate of profit used to discount the future cashflows for the purpose of measuring the impairment loss.

i) MurabahahIncome is recognised on effective profit rate basis over the period of the contract based on the principal amountsoutstanding.

ii) Ijarah Thumma Al-BaiIncome is recognised on effective profit rate over the term of the contract.

iii) Musharakah (Co-ownership)Income is accounted for on the basis of the reducing balance on a time-apportioned (the Bank’s co-ownershipportion) basis that reflects the effective yield on the asset.

iv) Bai Al-Inah (Sale and Buy Back)Income is recognised on effective profit rate basis over the period of the contract based on the principal amountsoutstanding.

v) Bai Bithaman AjilIncome is recognised on effective profit rate basis over the period of the contract based on the principal amountsoutstanding.

45



4 Significant Accounting Policies (Cont’d)

(b) Financing Income and Expenses (Cont’d)

vi) Ujrah (rendering services for credit card-i holders)Income is recognised based on the identified services, benefits and privileges in exchange of a fee.

vii) Ujrah (rendering services for facilities other than credit card-i holders)Income is recognised based on mutually agreed fee to provide the facility to customers.

Financing income and expenses from Islamic Banking operations are recognised on an accrual basis and inaccordance with the principles of Shariah.

Financing income and expenses of the Bank presented in the statement of profit and loss include:• profit on financial assets and liabilities measured at amortised costs calculated on an effective profit rate basis;• profit on FVOCI investment securities calculated on an effective profit rate basis;• the effective portion of fair value changes in qualifying hedging derivatives designated in cash flow hedges of

variability in profit cash flows, in the same period that the hedged cash flows affect financing income/expense;and

• the effective portion of fair value changes in qualifying hedging derivatives designated in fair value hedges ofprofit rate risk.

(c) Fees and commission, net trading income and other operating income

Fee income is earned from a diverse range of services the Bank provides to their customers. Fee income is accountedfor as follows:

• income earned on the execution of a significant act is recognised as revenue when the act is completed;• income earned from the provision of services is recognised as revenue as the services are provided; and• income which forms an integral part of the effective profit rate of a financial instrument is recognised as an

adjustment to the effective profit rate and recorded in ‘financing income’ (see Note 4(b)).

Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date forlisted equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities.

Net trading income comprises all gains and losses from changes in the fair value of financial assets and financialliabilities FVTPL, together with the related profit income and expense; and it also includes all gains and losses fromchanges in the fair value of derivatives that are managed in conjunction with financial assets and liabilities measuredat fair value through profit or loss.

Net income/(expense) from financial instruments designated at fair value includes:

• all gains and losses from changes in the fair value of financial assets and financial liabilities designated at fairvalue through profit or loss, including liabilities under investment contracts;

• all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financialassets and liabilities designated at fair value through profit or loss; and

• profit income, profit expense and dividend income in respect of:- financial assets and financial liabilities designated at fair value through profit or loss; and- derivatives managed in conjunction with the above,

except for profit arising from debt securities issued by the Bank and derivatives managed in conjunction with thosedebt securities, which is recognised in ‘financing income and expenses’ (Note 4(b)).

The fair value of financial instruments is generally measured on an individual basis. However, in cases where theBank manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fairvalue of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilitiesare presented separately in the financial statements, unless they satisfy the offsetting criteria.

46




(d) Income tax

Income tax comprises current tax and deferred tax. Income tax is recognised in the profit or loss except to the extentthat it relates to items recognised directly in other comprehensive income or directly in equity, in which case it isrecognised in the same statement in which the related item appears.

Current tax is the tax expected to be payable or receivable on the taxable income or loss for the financial year,calculated using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment totax payable in respect of previous financial years. The Bank provides for potential current tax liabilities that mayarise on the basis of the amounts expected to be paid to the tax authorities. Current tax assets and liabilities are offsetwhen the Bank intends to settle on a net basis and the legal right to offset exists.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in thebalance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities aregenerally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that itis probable that future taxable profits will be available against which deductible temporary differences can beutilised.

Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised orthe liabilities settled, based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to incometaxes levied by the same taxation authority, and when the Bank has a legal right to offset.

Deferred tax relating to fair value of FVOCI investments and cash flow hedging instruments which are charged orcredited directly to other comprehensive income, is also charged or credited to other comprehensive income and issubsequently recognised in the profit or loss when the deferred fair value gain or loss is recognised in the profit orloss.

(e) Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents include highly liquid investments that arereadily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Suchinvestments comprise cash at hand and bank balances, short term deposits and placements with banks maturingwithin one month.

(f) Financial instruments

(i) Initial recognition and measurement

A financial asset or a financial liability is recognised in the statement of financial position when, and only when theBank becomes a party to the contractual provisions of the instrument.

A financial instrument is recognised initially, at its fair value plus, in the case of a financial instrument not at fairvalue through profit or loss, transactions costs that are directly attributable to the acquisition or issue of the financialinstrument.

(ii) Financial instruments categories and subsequent measurement

The Bank categorises financial instruments as follows:

• financial instruments measured at amortised cost (See Note 4(g));• financial assets measured at fair value through other comprehensive income (FVOCI) (Note 4(h));• equity securities measured at fair value with fair value movements presented in OCI (Note 4(i)); or• financial instruments designated at fair value through profit or loss (FVTPL) (Note 4(j)).

The Bank classifies its financial liabilities, as measured at amortised cost or designated at fair value through profitor loss (See accounting policies in Notes 4(g) and 4(j)).

47




(f) Financial instruments (Cont’d)

(iii) Derecognition of financial assets and liabilities

Financial assets are derecognised when the rights to receive cash flows from the assets have expired; or where theBank has transferred its contractual rights to receive the cash flows of the financial assets, and has transferredsubstantially all the risks and rewards of ownership; or where both control and substantially all the risks and rewardsare not retained.

Financial liabilities are derecognised when they are extinguished, i.e. when the obligation is discharged, cancelled,or expires.

(iv) Offsetting financial assets/liabilities and income/expenses

Financial assets and liabilities are offset and the net amount reported in the statement of financial position whenthere is currently a legally enforceable right to offset the recognised amounts and the Bank intends to settle on a netbasis, or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingenton future events and must be enforceable in the normal course of business and in the event of default, insolvency orbankruptcy.

The ‘Gross amounts not offset in the statement of financial position’ for derivatives and securities purchased underresale agreements and similar arrangements include transactions where:

• the counterparty has an offsetting exposure with the Bank and a master netting or similar arrangement is in placewith a right of set off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwisenot satisfied; and

• cash and non-cash collaterals are received and pledged in respect of the transactions described above.

Income and expenses are presented on a net basis only when permitted under the MFRSs, or for gains and lossesarising from a group of similar transactions such as in the Bank’s trading activity.

(v) Valuation of financial instruments

All financial instruments are recognised initially at fair value. Fair value is the price that would be received to sellan asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair valueof the consideration given or received). However, if there is a difference between the transaction price and the fairvalue of financial instruments whose fair value is based on a quoted price in an active market or a valuation techniquethat uses only data from observable markets, the Bank recognises the difference as a trading gain or loss at inception(day 1 gain or loss). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statementover the life of the transaction when the inputs become observable, the transaction matures or is closed out, or whenthe Bank enters into an offsetting transaction.

The fair value of financial instruments is generally measured on an individual basis. However, in cases where theBank manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fairvalue of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilitiesare presented separately in the financial statements, unless they satisfy the MFRSs offsetting criteria.

Subsequent to initial recognition, the fair values of financial instruments measured at fair value are measured inaccordance with the Bank’s valuation methodologies, which are described in Note 7(b)(ii).

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(vi) Derivative financial instruments and hedge accounting

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, profitrates or other indices. Derivatives are recognised initially and are subsequently measured at fair value, with changesin fair value generally recorded in the income statement. Derivatives are classified as assets when their fair value ispositive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilitieswhich are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.Where the derivatives are managed with debt securities issued by the Bank that are designated at fair value, thecontractual profit is shown in ‘financing expense’ together with the profit payable on the issued debt.

Hedge accounting

When derivatives are held for risk management purposes, they are designated in hedge accounting relationshipswhere the required criteria for documentation and hedge effectiveness are met. The Bank enters into fair valuehedges, cash flow hedges or hedges of net investments in foreign operations as appropriate to the risk being hedged.

• Fair value hedgeFair value hedge accounting does not change the recording of gains and losses on derivatives and other hedginginstruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable tothe hedged risk that would not otherwise be recognised in the income statement. If a hedge relationship no longermeets the criteria for hedge accounting, hedge accounting is discontinued; the cumulative adjustment to thecarrying amount of the hedged item is amortised to the income statement on a recalculated effective profit rate,unless the hedged item has been derecognised, in which case it is recognised in the income statementimmediately.

• Cash flow hedgeThe effective portion of gains and losses on hedging instruments is recognised in other comprehensive income;the ineffective portion of the change in fair value of derivative hedging instruments that are part of a cash flowhedge relationship is recognised immediately in the income statement within ‘Other operating income’. Theaccumulated gains and losses recognised in other comprehensive income are reclassified to the income statementin the same periods in which the hedged item affects profit or loss. In hedges of forecast transactions that resultin recognition of a non-financial asset or liability, previous gains and losses recognised in other comprehensiveincome are included in the initial measurement of the asset or liability. When a hedge relationship is discontinued,or partially discontinued, any cumulative gain or loss recognised in other comprehensive income remains inequity until the forecast transaction is recognised in the income statement. When a forecast transaction is nolonger expected to occur, the cumulative gain or loss previously recognised in other comprehensive income isimmediately reclassified to the income statement.

• Hedging Instruments impacted by Inter-Bank Offered Rates (IBOR) Reform

Following the request received by the Financial Stability Board from the G20, a fundamental review and reformof the major profit rate benchmarks is under way across the world's largest financial markets. This reform wasnot contemplated when the standard was published, and consequently the MASB has published a set of temporaryexceptions from applying specific hedge accounting requirements to provide clarification on how the standardshould be applied in these circumstances. Under the temporary exceptions, IBORs are assumed to continue forthe purposes of hedge accounting until such time as the uncertainty is resolved.

Interest/Profit Rate Benchmark Reform: Amendments to MFRS 9 Financial Instruments, MFRS 139 FinancialInstruments: Recognition and Measurement and MFRS 7 Financial Instruments: Disclosures)

Amendments to MFRS 9, MFRS 139 and MFRS 7 were issued in October 2019 and modified specific hedgeaccounting requirements (the ‘temporary exceptions’). For example, under the temporary exceptions, IBORs areassumed to continue for the purposes of hedge accounting until such time as the uncertainty is resolved.

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(vi) Derivative financial instruments and hedge accounting (Cont’d)

• Hedging Instruments impacted by Inter-Bank Offered Rates (IBOR) Reform (Cont’d)

The application of this set of temporary exceptions is mandatory for accounting periods starting on or after 1 January2020, but early adoption is permitted and the Bank has elected to apply these exceptions for the year ended 31December 2019.

The Bank does not have any hedging instruments as at 31 December 2019.

(g) Financial instruments measured at amortised cost

Financial assets that are held to collect the contractual cash flows and that contain contractual terms that give riseon specified dates to cash flows that are solely payments of principal and profit, such as most advances and financingto banks and customers and some debt securities, are measured at amortised cost. In addition, most financialliabilities are measured at amortised cost. The carrying value of these financial assets at initial recognition includesany directly attributable transactions costs. If the initial fair value is lower than the cash amount advanced, such asin the case of some leveraged finance and syndicated lending activities, the difference is deferred and recognisedover the life of the financing through the recognition of profit income.

Financing and advances consist of Murabahah, Ijarah, Ijarah Thumma Al-Bai, Diminishing Musharakah, Bai Al-Inah, Bai Bithaman Ajil and Ujrah contracts. They include financing and advances to customers and placementswith banks that originated from the Bank, which are not classified as either held for trading or designated at fairvalue. They are recognised when cash is advanced to customers and derecognised when either the customer pays itsobligations, or the advances are sold or written off, or substantially all the risks and rewards of ownership aretransferred. They are initially recorded at fair value plus any directly attributable transaction costs and aresubsequently measured at amortised cost using the effective profit rate method, less any reduction from impairmentor uncollectibility.

Assets funded under Ijarah financing are owned by the Bank throughout the tenure of the Ijarah financing.Ownership of the assets will be transferred to the customers at the end of the Ijarah financing subject to thecustomer’s execution of the purchase option.

The Bank may commit to underwrite financing and advances on fixed contractual terms for specified periods oftime. When the financing and advances arising from the lending commitment is expected to be held for trading, thecommitment to lend is recorded as a derivative. When the Bank intends to hold the financing and advances, therelated commitment is included in the impairment calculations set out in Note 4(k). They are derecognised wheneither the borrower repays its obligations, or the financing and advances are sold or written off, or substantially allthe risks and rewards of ownership are transferred.

For financing under the Syndicated Investment Account for Financing/Investment Agency Account (SIAF/IAA)arrangements, the Bank applies the derecognition principles as stated in accounting policy Note 4(f)(iii) onderecognition of financial assets.

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(g) Financial instruments measured at amortised cost (Cont’d)

(i) Contracts under Islamic sell and buyback agreements

When debt securities are sold subject to a commitment to repurchase them at a predetermined price (repos), theyremain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchasedunder commitments to resell (reverse repos) are not recognised on the balance sheet and an asset is recorded inrespect of the initial consideration paid. Non-trading repos and reverse repos are measured at amortised cost. Thedifference between the sale and repurchase price or between the purchase and resale price is treated as profit andrecognised in net financing income over the life of the agreement. Contracts that are economically equivalent toreverse repurchase or repurchase agreements (such as sales or purchases of debt securities entered into together withtotal return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverserepurchase or repurchase agreements.

(ii) Financial liabilities measured at amortised cost

Financial liabilities that are not classified as fair value through profit or loss fall into this category and are measuredat amortised cost. The financial liabilities measured at amortised cost are deposits from customers, deposits andplacement from banks and other financial institutions, bills payable, other liabilities and subordinated liabilities.

Financial liabilities are recognised when and the Bank enters into the contractual provisions of the arrangementswith counterparties, which are generally on trade date, and initially measured at fair value, which is normally theconsideration received. Subsequent measurement of financial liabilities, other than those measured at fair valuethrough profit or loss and financial guarantees, is at amortised cost, using the effective profit method to amortise thedifference between proceeds received, net of directly attributable transaction costs incurred, and the redemptionamount over the expected life of the instrument.

Subordinated liabilities of the Bank is measured at amortised cost using the effective profit rate method, except forthe portions which are fair value hedged, which are adjusted for the fair value gains or losses attributable to thehedged risks. Profits payable on subordinated liabilities of the Bank is recognised on an accrual basis.

(h) Financial assets measured at fair value through other comprehensive income (FVOCI)

Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling andthat contain contractual terms that give rise on specified dates to cash flows that are solely payments of principaland profit are measured at FVOCI. These comprise primarily debt securities. They are recognised on the trade datewhen and the Bank enters into contractual arrangements to purchase and are normally derecognised when they areeither sold or redeemed. They are subsequently remeasured at fair value and changes therein (except for thoserelating to impairment, financing income and foreign currency exchange gains and losses) are recognised in othercomprehensive income until the assets are sold. Upon disposal, the cumulative gains or losses in othercomprehensive income are recognised in the income statement as ‘Other operating income’. Financial assetsmeasured at FVOCI are included in the impairment calculations set out below and impairment is recognised in profitor loss.

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(i) Equity securities measured at fair value with fair value movements presented in Other Comprehensive Income(OCI)

The equity securities for which fair value movements are shown in OCI are business facilitation and other similarinvestments where the Bank holds the investments other than to generate a capital return. Gains or losses on thederecognition of these equity securities are not transferred to profit or loss. Dividend income is recognised in profitor loss.

(j) Financial instruments designated at fair value through profit or loss (FVTPL)

Financial instruments, other than those held for trading, are classified in this category if they meet one or more ofthe criteria set out below and are so designated irrevocably at inception:

• the use of the designation removes or significantly reduces an accounting mismatch; and• when a group of financial assets and liabilities or a group of financial liabilities is managed and its performance

is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.• where the financial liability contains one or more non-closely related embedded derivatives

Designated financial assets are recognised when the Bank enters into contracts with counterparties, which is generallyon trade date, and are normally derecognised when the rights to the cash flows expire or are transferred. Designatedfinancial liabilities are recognised when the Bank enters into contracts with counterparties, which is generally onsettlement date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognisedin the income statement in ‘Net income/(expenses) from financial liabilities designated at fair value’ except for theeffect of changes in the liabilities' credit risk which is presented in OCI, unless that treatment would create or enlargean accounting mismatch in profit or loss.

Under the above criterion, the main classes of financial instruments designated by the Bank are:

• Debt instruments for funding purposes that are designated to reduce an accounting mismatch (including Multi-currency sukuk programme)

The profit and/or foreign exchange exposure on certain fixed rate debt securities issued has been matched withthe profit and/or foreign exchange exposure on certain swaps as part of a documented risk management strategy.

• Structured liabilities designated at fair value through profit or loss (FVTPL)

Structured liabilities of the Bank designated at fair value are recognised in the balance sheet in ‘StructuredLiabilities Designated at Fair Value’. Please refer to Note 22.

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(k) Impairment of amortised cost and FVOCI financial assets

Expected credit losses (ECL) are recognised for placements and advances to banks, advances and financing tocustomers, non-trading reverse repurchase agreements, other financial assets held at amortised cost, debt instrumentsmeasured at fair value through other comprehensive income, and certain financing commitments and financialguarantee contracts. At initial recognition, allowance (or provision in the case of some financing commitments andfinancial guarantees) is required for ECL resulting from default events that are possible within the next 12 months(or less, where the remaining life is less than 12 months) (12-month ECL). In the event of a significant increase incredit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expectedlife of the financial instrument (lifetime ECL). Financial assets where 12-month ECL is recognised are consideredto be ‘Stage 1’; financial assets which are considered to have experienced a significant increase in credit risk are in‘Stage 2’; and financial assets for which there is objective evidence of impairment so are considered to be in defaultor otherwise credit-impaired are in ‘Stage 3’.

(i) Credit-impaired (Stage 3)

The Bank determines that a financial instrument is credit-impaired and in Stage 3 by considering relevant objectiveevidence, primarily whether:

• Qualitative criteria- there are other indications that the borrower is unlikely to pay such as when a concession has been granted to

the borrower for economic or legal reasons relating to the borrower’s financial condition; and- the financing and advances is otherwise considered to be in default.

• Quantitative criteria- contractual payments of either principal or profit are past due for more than 90 days.

If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days pastdue. Therefore the definitions of credit-impaired and default are aligned as far as possible so that Stage 3 representsall financings which are considered defaulted or otherwise credit-impaired. Financing income is recognised byapplying the effective profit rate to the amortised cost amount, i.e. gross carrying amount less ECL allowance.

(ii) Write-off

Financial assets (and the related impairment allowances) are normally written off, either partially or in full, whenthere is no realistic prospect of recovery. Where financing are secured, this is generally after receipt of any proceedsfrom the realisation of security. In circumstances where the net realisable value of any collateral has been determinedand there is no reasonable expectation of further recovery, write-off may be earlier.

In line with HSBC Global policy, financing and advances is made on the basis of the customer’s capacity to repay,as opposed to placing primary reliance on credit risk mitigation. Depending on the customer’s standing and the typeof product, facilities may be provided unsecured. Mitigation of credit risk is nevertheless a key aspect of effectiverisk management and in the Bank, takes many forms, the most common method of which is to take collateral. Theprincipal collateral types employed by the Bank are as follows:

• under the residential and real estate business; financing over residential and financed properties;• under certain Islamic specialised financing and leasing transactions (such as machinery financing) where physical

assets form the principal source of facility repayment, physical collateral is typically taken;• in the commercial and industrial sectors, charges over business assets such as premises, stock and debtors;• facilities provided to small and medium enterprises are commonly granted against guarantees by their

owners/directors;• guarantees from third parties can arise where facilities are extended without the benefit of any alternative form

of security, e.g. where the Bank issue a bid or performance bond in favour of a non-customer at the request ofanother bank;

• under the institutional sector, certain trading facilities are supported by charges over financial instruments suchas cash, debt securities and equities; and

• financial collateral in the form of marketable securities is used in much of the over-the-counter (OTC)derivatives activities and in the Bank’s securities financing business (securities lending and borrowing or reposand reverse repos).

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(k) Impairment of amortised cost and FVOCI financial assets (Cont’d)

(iii) Renegotiation

Financing and advances are identified as renegotiated and classified as credit-impaired when the contractual paymentterms are modified due to significant credit distress of the borrower. Renegotiated financing remain classified ascredit-impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-paymentof future cash flows and retain the designation of renegotiated until maturity or derecognition.

A financing and advances that is renegotiated is derecognised if the existing agreement is cancelled and a newagreement is made on substantially different terms or if the terms of an existing agreement are modified such thatthe renegotiated financing is a substantially different financial instrument. The renegotiated financing will only bereclassified as unimpaired when restructured payment is received and observed for a minimum period of 12 months.

Other than originated credit-impaired financing, all other modified financing could be transferred out of Stage 3 ifthey no longer exhibit any evidence of being credit-impaired and, in the case of renegotiated financing, there issufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, over theminimum observation period, and there are no other indicators of impairment. These financing could be transferredto Stage 1 or 2 based on the mechanism as described below by comparing the risk of a default occurring at thereporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition(based on the original, unmodified contractual terms). Any amount written off as a result of the modification ofcontractual terms would not be reversed. For detail of the risk management process on renegotiated financings,please refer to ‘Renegotiated financings and forbearance’ in Note 5(b)(iii).

(iv) Financing and advances modifications that are not credit-impaired

Financing and advances modifications that are not identified as renegotiated are considered to be commercialrestructuring. Where a commercial restructuring results in a modification (whether legalised through an amendmentto the existing terms or the issuance of a new financing contract) such that the Bank’s rights to the cash flows underthe original contract have expired, the old financing is derecognised and the new financing is recognised at fair value.The rights to cash flows are generally considered to have expired if the commercial restructure is at market rates andno payment-related concession has been provided. The Bank also assesses whether the new financial assetrecognised is deemed to be credit-impaired at initial recognition, especially in circumstances where the renegotiationwas driven by the debtor being unable to make the originally agreed payments. Differences in the carrying amountare also recognised in profit or loss as a gain or loss on derecognition.

(v) Significant increase in credit risk (Stage 2)

An assessment of whether credit risk has increased significantly since initial recognition is performed at eachreporting period by considering the change in the risk of default occurring over the remaining life of the financialinstrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting datecompared to that at initial recognition, taking into account reasonable and supportable information, includinginformation about past events, current conditions and future economic conditions. The assessment is unbiased,probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in themeasurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor isrelevant and its weight compared with other factors depends on the type of product, the characteristics of the financialinstrument and the borrower, and the geographical region. Therefore, it is not possible to provide a single set ofcriteria that will determine what is considered to be a significant increase in credit risk and these criteria will differfor different types of lending, particularly between retail and wholesale. However, unless identified at an earlierstage, all financial assets are deemed to have suffered a significant increase in credit risk when 30 days past due. Inaddition, wholesale financing that are individually assessed, and are included in the watch or worry list due to creditreason, are included in Stage 2.

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(v) Significant increase in credit risk (Stage 2) (Cont’d)

For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default(PD) which encompasses a wide range of information including the obligor’s customer risk rating, macroeconomiccondition forecasts and credit transition probabilities. For origination CRRs up to 3.3, significant increase in creditrisk is measured by comparing the average PD for the remaining term estimated at origination with the equivalentestimation at reporting date. The quantitative measure of significance varies depending on the credit quality atorigination as follows:

Origination CRR Significant trigger – PD to increase by0.1-1.2 15bps2.1-3.3 30bps

For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurredwhen the origination PD has doubled. The significance of changes in PD was informed by expert credit riskjudgement, referenced to historical credit migrations and to relative changes in external market rates.

For financing and advances originated prior to the implementation of MFRS 9, the origination PD does not includeadjustments to reflect expectations of future macroeconomic conditions since these are not available without the useof hindsight. In the absence of this data, origination PD must be approximated assuming through-the-cycle (TTC)PDs and TTC migration probabilities, consistent with the instrument’s underlying modelling approach and the CRRat origination. For these financing, the quantitative comparison is supplemented with additional CRR deteriorationbased thresholds as set out in the table below:

Origination CRR Additional significance criteria – Number of CRR grade notches deteriorationrequired to identify as significant credit deterioration (Stage 2) (>or equal to)

0.1 5 notches1.1-4.2 4 notches4.3-5.1 3 notches5.2-7.1 2 notches7.2-8.2 1 notches8.3 0 notches

Please refer to Note 5(b)(ii) for the 23-grade scale used for CRR.

For certain portfolios of debt securities where external market ratings are available and credit ratings are not used incredit risk management, the debt securities will be in Stage 2 if their credit risk increases to the extent they are nolonger considered investment grade. Investment grade is where the financial instrument has a low risk of incurringlosses, the structure has a strong capacity to meet its contractual cash flow obligations in the near term and adversechanges in economic and business conditions in the longer term may, but will not necessarily, reduce the ability ofthe borrower to fulfil their contractual cash flow obligations.

For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores whichincorporate all available information about the customer. This PD is adjusted for the effect of macroeconomicforecasts for periods longer than 12 months and is considered to be a reasonable approximation of a lifetime PDmeasure. Retail exposures are first segmented into homogeneous portfolios, generally by product. Within eachportfolio, the Stage 2 accounts are defined as accounts with an adjusted 12-month PD greater than the average 12-month PD of financings in that portfolio 12 months before they become 30 days past due. The expert credit riskjudgment is that no prior increase in credit risk is significant. This portfolio-specific threshold identifies financingswith a PD higher than would be expected from financings that are performing as originally expected and higher thanthat which would have been acceptable at origination. It therefore approximates a comparison of origination toreporting date PDs.

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(vi) Unimpaired and without significant increase in credit risk – (Stage 1)

ECL resulting from default events that are possible within the next 12 months (12-month ECL) are recognised forfinancial instruments that remain in Stage 1.

(vii) Movement between stages

Financial assets can be transferred between the different categories depending on their relative increase in credit risksince initial recognition. Financial instruments are transferred out of Stage 2 if their credit risk is no longer consideredto be significantly increased since initial recognition based on the assessments described above. Except forrenegotiated financing, financial instruments are transferred out of Stage 3 when they no longer exhibit any evidenceof credit impairment as described above. Renegotiated financing will continue to be in Stage 3 until there is sufficientevidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over aminimum one-year period and there are no other indicators of impairment. For financing that are assessed forimpairment on a portfolio basis, the evidence typically comprises a history of payment performance against theoriginal or revised terms, as appropriate to the circumstances. For financing that are assessed for impairment on anindividual basis, all available evidence is assessed on a case-by-case basis.

(viii) Measurement of ECL

The assessment of credit risk, and the estimation of ECL, are unbiased and probability-weighted, and incorporate allavailable information which is relevant to the assessment including information about past events, current conditionsand reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition,the estimation of ECL should take into account the time value of money.

In general, the Bank calculates ECL using three main components, a probability of default, a loss given default andthe exposure at default (EAD).

The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated usingthe lifetime PD instead. The 12-month and lifetime PDs represent the probability of default occurring over the next12 months and the remaining maturity of the instrument respectively.

The EAD represents the expected balance at default, taking into account the repayment of principal and profit fromthe balance sheet date to the default event together with any expected drawdowns of committed facilities. The LGDrepresents expected losses on the EAD given the event of default, taking into account, among other attributes, themitigating effect of collateral value at the time it is expected to be realised and the time value of money.

The ECL for wholesale Stage 3 is determined on an individual basis using a discounted cash flow (DCF)methodology. The expected future cash flows are based on the credit risk officer’s estimates as at the reporting date,reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receiptsof profit. Collateral is taken into account if it is likely that the recovery of the outstanding amount will includerealisation of collateral based on its estimated fair value of collateral at the time of expected realisation, less costsfor obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation ofthe original effective profit rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference to the three economic scenarios applied more generally by the Bank and the judgment of thecredit risk officer in relation to the likelihood of the workout strategy succeeding or receivership being required. Forless significant cases, the effect of different economic scenarios and work-out strategies is approximated and appliedas an adjustment to the most likely outcome.

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(ix) Period over which ECL is measured

Expected credit loss is measured from the initial recognition of the financial asset. The maximum period consideredwhen measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which the Bank isexposed to credit risk. For wholesale overdrafts, credit risk management actions are taken no less frequently than onan annual basis and therefore this period is to the expected date of the next substantive credit review. The date of thesubstantive credit review also represents the initial recognition of the new facility. However, where the financialinstrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment andcancel the undrawn commitment does not serve to limit the Bank’s exposure to credit risk to the contractual noticeperiod, the contractual period does not determine the maximum period considered. Instead, ECL is measured overthe period the Bank remains exposed to credit risk that is not mitigated by credit risk management actions. Thisapplies to retail overdrafts and credit cards, where the period is the average time taken for Stage 2 exposures todefault or close as performing accounts, determined on a portfolio basis and ranging from between two and six years.In addition, for these facilities it is not possible to identify the ECL on the financing commitment componentseparately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for thefinancial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECLis recognised as a provision.

(x) Forward-looking economic inputs

The Bank applies multiple forward-looking global economic scenarios determined with reference to externalforecast distributions representative of their view of forecast economic conditions. This approach is consideredsufficient to calculate unbiased expected loss in most economic environments. Additional analysis may benecessary and may result in additional scenarios or adjustments, to reflect a range of possible economicoutcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in ‘Measurementuncertainty and sensitivity analysis of ECL estimates’in Note 5(b)(v).

(xi) Grouping of instruments for ECL measured on collective basis

ECL may be determined on collective or individual basis for the following:• perform assessment of significant increases in credit risk• determining loss allowance measurement

This disclosure is applicable for both general 3-stage approach and simplified approach.

The following factors are considered when computing ECL:• availability of reasonable and supportable information that is more forward-looking than past due information

without undue cost or effort, which considers comprehensive credit risk information• availability of credit risk information for particular groups of financial instruments vs individual instruments• shared credit risk characteristics. Example as follows:

- instrument type- credit risk ratings- collateral type- date of initial recognition- remaining term to maturity- industry- geographical location of debtor- the value of collateral relative to the financial asset if it has impact to probability of a default occurring

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(l) Equipment

Equipment, fixtures and fittings and motor vehicles are stated at cost less accumulated depreciation and anyaccumulated impairment losses. Depreciation is calculated on a straight-line basis to write off the assets over theiruseful lives as follows:

Office equipment, fixtures and fittings 5 to 7 yearsComputer equipment 4 to 5 yearsMotor vehicles 5 years

Additions to equipment costing RM1,000 and below are expensed to profit or loss in the month of purchase. Forthose assets costing more than RM1,000, depreciation is provided at the above rates.

The gains or losses on disposal of an item of equipment is determined by comparing the proceeds from disposal withthe carrying amount of the equipment and is recognised net within “other operating income” in the profit or loss.

Equipment is subject to an impairment review if there are events or changes in circumstances which indicate thatthe carrying amount may not be recoverable.

(m) Leases

Prior to 1 January 2019

Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Bank, arerecognised as operating lease. Payments made under operating lease (net of any incentives received from the lessor)are charged to the statement of profit or loss under ‘Establishment related expenses’ on a straight-line basis over theperiod of the lease.

After 1 January 2019

Leases are recognised as a ROU asset and a corresponding lease liability at the date at which the leased asset is madeavailable for use. ROU asset is presented within “Other Assets” in the statement of financial position, and isdepreciated, over the shorter of the ROU asset’s useful economic life and the lease term, on a straight-line basis.

Lease liability is represented in the “Other Liabilities” in the statement of financial position. Lease payments areallocated between the liability and finance cost. The finance cost is charged to the statement of profit or loss asfinance expense over the lease term so as to produce a constant period profit rate on the remaining balance of theliability.

In determining the lease term, all facts and circumstances that create an economic incentive to exercise an extensionor termination option are considered.

Where the discount rate implicit in the lease is unavailable, the incremental borrowing rate is used. This is the ratethat the Bank would has to pay to borrow the funds necessary to obtain an asset of a similar value in a similareconomic environment at similar terms and conditions.

The Bank has elected not to recognise ROU assets and lease liabilities for short-term leases that have lease terms of12 months or less and leases of low value leases. Lease payments relating to these leases are expensed to thestatement of profit or loss on a straight-line basis over the lease term.

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(n) Bills payable

Bills payable represents bills payable to various beneficiaries arising from the sale of bank drafts, demand drafts,cashier’s orders and certified cheques.

(o) Intangible assets

Intangible assets of the Bank represent computer software that have a finite useful life, and are stated at cost lessaccumulated amortisation and any accumulated impairment losses. Computer software includes both purchased andinternally generated software. The cost of internally generated software comprises all directly attributable costsnecessary to create, produce and prepare the software to be capable of operating in the manner intended bymanagement. Costs incurred in the ongoing maintenance of software are expensed immediately as incurred.

Amortisation of intangible assets is calculated to write off the cost of the intangible assets on a straight line basisover the estimated useful lives of 3 to 5 years. Intangible assets are subject to impairment review if there are eventsor changes in circumstances which indicate that the carrying amount may not be recoverable.

(p) Provisions, contingent liabilities and financial guarantees contracts

Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a presentlegal or constructive obligation that has arisen as a result of past events and for which a reliable estimate can bemade.

Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, andcontingent liabilities related to legal proceedings or regulatory matters, are not recognised in the financial statementsbut are disclosed unless the probability of settlement is remote.

Financial guarantees contracts

Liabilities under financial guarantees contracts which are not classified as insurance contracts are recorded initiallyat their fair value, which is generally the fee received or present value of the fee receivable.

Financial guarantees contracts are subsequently measured at the higher of the amount determined in accordance withthe expected credit loss model under MFRS 9 ‘Financial instruments’ and the amount initially recognised lesscumulative amount of income recognised in accordance with the principles of MFRS 15 ‘Revenue from Contractswith Customers’, where appropriate.

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(q) Employee benefits

(i) Short term employee benefits

Short term employee benefit obligations in respect of salaries, annual bonuses, paid annual leave and sick leave aremeasured at the amounts expected to be paid when the liabilities are settled and are expensed as the related serviceis provided.

A liability is recognised for the amount expected to be paid under short term cash bonus or profit-sharing plans ifthe Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by theemployee and the obligation can be estimated reliably.

(ii) Defined contribution plan

As required by law, companies in Malaysia make contributions to the Employees Provident Fund (EPF). Suchcontributions are recognised as an expense in the statement of profit or loss as incurred.

(iii) Termination benefits

Termination benefits where applicable are payable when employment is terminated by the Bank for mutual orvoluntary separation. The Bank recognise termination benefits when the Bank recognises costs for a restructuringthat is within the scope of MFRS 137 ‘Provisions, Contingent Liabilities and Contingent Assets’ and involves thepayment of termination benefits. In the case of voluntary separation, the termination benefits are estimated based onthe number of employees expected to apply and be accepted for the separation.

(r) Share based payments

The Bank’s ultimate holding company operates a number of equity-settled share based payment arrangements withthe Bank’s employees as compensation for services provided by the employees. Equity-settled share based paymentarrangements entitle employees to receive equity instruments of the ultimate holding company, HSBC Holdings plc.

The cost of share-based payment arrangements with employees is measured by reference to the fair value of equityinstruments on the date they are granted, and recognised as an expense on a straight-line basis over the vestingperiod, with a corresponding credit to the equity. The credit to equity is treated as capital contribution as the ultimateholding company is compensating the Bank’s employees with no expense to the Bank. The vesting period is theperiod during which all the specified vesting conditions of a share-based payment arrangement are to be satisfied.The fair value of equity instruments that are made available immediately, with no vesting period attached to theaward, are expensed immediately.

Fair value is determined by using market prices or appropriate valuation models, taking into account the terms andconditions upon which the equity instruments were granted. Vesting conditions include service conditions andperformance conditions; any other features of a share-based payment arrangement are non-vesting conditions.Market performance conditions and non-vesting conditions are taken into account when estimating the fair value ofequity instruments at the date of grant, so that an award is treated as vesting irrespective of whether the marketperformance condition or non-vesting condition is satisfied, provided all other vesting conditions are satisfied.

Vesting conditions, other than market performance conditions, are not taken into account in the initial estimate ofthe fair value at the grant date. They are taken into account by adjusting the number of equity instruments includedin the measurement of the transaction, so that the amount recognised for services received as consideration for theequity instruments granted shall be based on the number of equity instruments that eventually vest. On a cumulativebasis, no expense is recognised for equity instruments that do not vest because of a failure to satisfy non-marketperformance or service conditions.

Where an award has been modified, as a minimum, the expense of the original award continues to be recognised asif it had not been modified. Where the effect of a modification is to increase the fair value of an award or increasethe number of equity instruments, the incremental fair value of the award or incremental fair value of the extra equityinstruments is recognised in addition to the expense of the original grant, measured at the date of modification, overthe modified vesting period.

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(r) Share based payments (Cont’d)

A cancellation that occurs during the vesting period is treated as an acceleration of vesting, and recognisedimmediately for the amount that would otherwise have been recognised for services over the remaining vestingperiod.

Where the ultimate holding company recharges the Bank for the equity instruments granted, the recharge isrecognised over the vesting period.

(s) Share capital and other equity instruments

Ordinary shares and other equity instruments with discretionary dividends are classified as equity according to thesubstance of the contractual arrangement of the particular instrument. Dividend distributions to holders of an equityinstrument is recognised directly in equity.

(t) Earnings per share

The Bank presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividingthe profit or loss attributable to the ordinary shareholder of the Bank by the weighted average number of sharesoutstanding during the year.

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5 Risk

a) Introduction and overview

(i) Conservative risk appetite

The Bank maintains a conservative approach to risk. These are central to the business and strategy.

The importance of a strong risk culture is long recognised, which refers to shared attitudes, values and norms that

shape behaviours related to risk awareness, risk taking and risk management. All employees are responsible for

the management of risk, with the ultimate accountability residing with the Board.

We seek to build our business for the long term by balancing social, environmental and economic considerationsin the decisions we make. Our strategic priorities are underpinned by our endeavour to operate in a sustainableway. This helps us to carry out our social responsibility and manage the risk profile of the business. We arecommitted to managing and mitigating climate related risks, both physical and transition, and will continue toincorporate this into how we manage and oversee risks internally and with our customers.

The following principles guide our overarching risk appetite and determine how its businesses and risks are

managed.

Financial position

• Aim to maintain a strong capital position, defined by regulatory and internal capital ratios.

• Carry out liquidity and funding management for each operating entity, on a stand-alone basis.

Operating model

• Seek to generate returns in line with a conservative risk appetite and strong risk management capability.

• Aim to deliver sustainable earnings and consistent returns for shareholders.

Business practice

• Zero tolerance for any of the employee to knowingly engage in any business, activity or association where

foreseeable reputational risk or damage has not been considered and/or mitigated.

• No appetite for deliberately or knowingly causing detriment to consumers, or incurring a breach of the letter

or spirit of regulatory requirements.

• No appetite for inappropriate market conduct by a member of staff or by any group business.

Enterprise-wide application

The Bank’s risk appetite encapsulate considerations of financial and non-financial risks. They are applied at the

across HSBC Group entities.

Financial risk is defined as the risk of a financial loss as a result of business activities. These types of risks are

actively taken to maximise shareholder value and profits. Non-financial risk is defined as the risk to achieving the

Bank’s strategy or objectives as a result of inadequate or failed internal processes, people and systems or from

external events.

HSBC Group’s risk appetite is expressed in both quantitative and qualitative terms and applied at the global

business level, at the regional level and to material operating entities such as the Bank.

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5 Risk (Cont’d)

a) Introduction and overview (Cont’d)

(i) Conservative risk appetite (Cont’d)

Enterprise-wide application (Cont’d)

The Board reviews and approves the Bank’s risk appetite to make sure it remains fit for purpose. The risk appetite

is considered, developed and enhanced through:

• an alignment with our strategy, purpose, values and customer needs;

• trends highlighted in other group risk reports, such as the ‘Risk map’ and ‘Top and emerging risks’;

• communication with risk stewards on the developing risk landscape;

• strength of our capital, liquidity and balance sheet;

• compliance with applicable laws and regulations;

• effectiveness of the applicable control environment to mitigate risk, informed by risk ratings from risk control

assessments;

• functionality, capacity and resilience of available systems to manage risk; and

• the level of available staff with the required competencies to manage risks.

The Bank formally articulate risk appetite through the risk appetite statement (RAS), which is approved by the

Board. Setting out risk appetite helps to make sure that planned business activities provide an appropriate balance

of return for the risk taken, and that suitable level of risk is agreed for the Bank. In this way, risk appetite informs

financial planning process and helps senior management to allocate capital to business activities, services and

products.

The RAS consists of qualitative statements and quantitative metrics, covering financial and non-financial risks. It

is fundamental to the development of business line strategies, strategic and business planning, and senior

management balanced scorecards.

The performance against the RAS is reported to the Risk Management Meeting (RMM) on a monthly basis so that

any actual performance that falls outside the approved risk appetite is discussed and appropriate mitigating actions

are determined. This reporting allows risks to be promptly identified and mitigated, and informs risk-adjusted

remuneration to drive a strong risk culture. All RASs and business activities are guided and underpinned by

qualitative principles and or quantitative metrics.

(ii) Risk management

The Bank recognises that the primary role of risk management is to protect the business, customers, colleagues,shareholders and the communities that we serve, while ensuring we are able to support our strategy and providesustainable growth. As we move into revised business focus, active risk management will be critical in ensuringthe associated change and execution risks arising from a major change programme are managed. In additionperiodic risk assessments will be performed, including strategies to ensure retention of key personnel to ensurecontinued safe operation.

An enterprise-wide risk management framework is used across the organisation and across all risk types,underpinned by the Bank’s risk culture. This outlines the key principles, policies and practices that is employed inmanaging material risks, both financial and non-financial.

The framework fosters continuous monitoring, promotes risk awareness and encourages sound operational andstrategic decision making. It also ensures a consistent approach to identifying, assessing, managing and reportingthe risks we accept and incur in our activities.

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5 Risk (Cont’d)


(ii) Risk management (Cont’d)

Risk management framework

The following diagram and descriptions summarise key aspects of the framework, including governance andstructure, risk management tools and risk culture, which together help align employee behaviour with Bank’s riskappetite.

Key components of our risk management framework

Risk governance

Non-executive risk governanceThe Board approves the risk appetite, plans and

performance targets. It sets the ‘tone from the top’

and is advised by the Risk Committee.

Executive risk governance

Executive risk governance structure is responsible

for the enterprise-wide management of all risks,

including key policies and frameworks for the

management of risk within the HSBC Group.

Roles and

responsibilitiesThree lines of defence model

The ‘three lines of defence’ model defines roles and

responsibilities for risk management. An

independent Risk function ensures the necessary

balance in risk/return decisions.

Processes and

tools

Risk appetite

HSBC Group has several processes to

identify/assess, monitor, manage and report risks to

ensure we remain within our risk appetite.

Enterprise-wide risk

management toolsActive risk management:

identification/assessment,

monitoring, management and

reporting

Internal controls

Policies and procedures

Policies and procedures define the minimum

requirements for the controls required to manage

risks.

Control activities

The operational risk management framework

defines minimum standards and processes for

managing operational risks and internal controls.

Systems and infrastructure

HSBC Group has systems and/or processes that

support the identification, capture and exchange of

information to support risk management activities.

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5 Risk (Cont’d)



Risk governance

The Board has ultimate responsibility for the effective management of risk and approves the Bank’s risk appetite.It is advised on risk-related matters by the Risk Committee.

Executive accountability for the ongoing monitoring, assessment and management of risk environment and theeffectiveness of the risk management framework resides with the Chief Risk Officer. He is supported by the RMM.

The management of financial crime risk resides with the Chief Executive Officer. He is supported by the FinancialCrime Risk Management Committee.

The day-to-day responsibility for risk management is delegated to senior managers with individual accountabilityfor decision making. All employees have a role to play in risk management. These roles are defined using the threelines of defence model, which takes into account our business and functional structures.

A defined executive risk governance structure is used to help ensure appropriate oversight and accountability ofrisk, which facilitates reporting and escalation to the RMM.

Responsibilities for risk management

All employees are responsible for identifying and managing risk within the scope of their role as part of the threelines of defence model.

Three lines of defence

To create a robust control environment to manage risks, we use an activity-based three lines of defence model.This model delineates management accountabilities and responsibilities for risk management and the controlenvironment.

The model underpins our approach to risk management by clarifying responsibilities, encouraging collaborationand enabling efficient coordination of risk and control activities.

The three lines of defence are summarised below:• The first line of defence owns the risks and is responsible for identifying, recording, reporting and managing

them in line with risk appetite, and ensuring that the right controls and assessments are in place to mitigatethem.

• The second line of defence sets the policy and guidelines for managing specific risk areas, provides adviceand guidance in relation to the risk, and challenges the first line of defence on effective risk management.

• The third line of defence is the Internal Audit function, which provides independent assurance that riskmanagement, governance and internal control processes are designed and operating effectively

Risk function

The Risk function, headed by the Chief Risk Officer, is responsible for the risk management framework. Thisresponsibility includes establishing and monitoring of risk profiles, and forward-looking risk identification andmanagement. The Risk function is made up of sub-functions covering all risks to our business and forms part ofthe second line of defence. It is independent from the global businesses, including sales and trading functions, toprovide challenge, appropriate oversight and balance in risk/return decisions.

Responsibility for minimising both financial and non-financial risk lies with the employees. They are required tomanage the risks of the business and operational activities for which they are responsible. Adequate oversight ofrisks are maintained through various specialist Risk Stewards, along with an aggregate overview through the ChiefRisk Officer.

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5 Risk (Cont’d)



Risk function (Cont’d)

Non-financial risk includes some of the most material risks the Bank faces, such as cyber-attacks, the loss of dataand poor conduct outcomes. Actively managing non-financial risk is crucial to serving our customers effectivelyand having a positive impact on society. During 2019 we continued to strengthen the control environment and ourapproach to the management of non-financial risk, as set out in our Operational Risk Management Framework.The approach outlines non-financial risk governance and risk appetite, and provides a single view of the non-financial risks that matter the most, and associated controls. It incorporates a risk management system designed toenable the active management of non-financial risk. Our ongoing focus is on simplifying our approach to non-financial risk management, while driving more effective oversight and better end-to-end identification andmanagement of non-financial risks. This is overseen by the Operational Risk function, headed by the HSBC GroupHead of Operational Risk.

Stress testing

The Bank operates a wide-ranging stress testing programme that supports risk management and capital planning.Stress testing provides management with key insights into the impact of severely adverse events, and providesconfidence to regulators on financial stability.

As well as undertaking regulatory-driven stress tests, we conduct our own internal stress tests, in order tounderstand the nature and level of all material risks, quantify the impact of such risks and develop plausiblebusiness as usual mitigating actions.

The stress testing programme assesses capital and liquidity strength through a rigorous examination of resilienceto external shocks from a range of stress scenarios. They include potential adverse macroeconomic, geopoliticaland operational risk events, and other potential events that are specific to the Bank. Stress testing analysis helpsmanagement understand the nature and extent of vulnerabilities to which the Bank is exposed and informsdecisions about preferred capital or liquidity levels.

Separately, reverse stress tests are conducted at the Bank in order to understand which potential extreme conditionswould make the business model non-viable. Reverse stress testing identifies potential stresses and vulnerabilitieswhich the Bank might face, and helps inform early warning triggers, management actions and contingency plansdesigned to mitigate risks.

Key developments in 2019

In 2019, a number of initiatives were undertaken to enhance the approach to management of risk. There have beencontinued efforts to simplify and enhance how we manage risk. The HSBC Group risk taxonomy has beensimplified through consolidating certain existing risks into broader categories. These changes streamlined riskreporting and promoted common language in our risk management approach. Further simplification will continueduring 2020, including the combining of two key risk management frameworks. These changes include:

• Forming a Resilience Risk sub-function to reflect the growing regulatory importance of being able to ensureour operations continue to function when an operational disturbance occurs. Resilience Risk was formed tosimplify the way we interact with our stakeholders and to deliver clear, consistent and credible responsesglobally. The leadership of the resilience risk function is the responsibility of the Head of Resilience Risk.

• Placing greater focus on our model risk activities during 2019. To reflect this, HSBC Group has created therole of Chief Model Risk Officer, which for group is undertaken by the Head of Model Risk Management.

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5 Risk (Cont’d)



Top and emerging risks management

The Bank uses a top and emerging risks process to provide a forward looking view of issues that have the potentialto threaten the execution of strategy or operations over the medium to long term.

The Bank proactively assess the internal and external risk environment, as well as review the themes identifiedacross regions and global businesses, for any risks that may require global escalation, updating top and emergingrisks as necessary.

The Bank defines a ‘top risk’ as a thematic issue that may form and crystallise between six months and one year,and has the potential to materially affect the Bank’s financial results, reputation or business model. It may ariseacross any combination of risk types, countries or global businesses. The impact may be well understood by seniormanagement and some mitigating actions may already be in place. Stress tests of varying granularity may alreadyhave been carried out to assess the impact.

An ‘emerging risk’ is defined as a thematic issue with large unknown components that may form and crystallisebeyond a one year time horizon. If it were to materialise, it could have a significant material effect on a combinationof our long term strategy, profitability and reputation. Existing management action plans are likely to be minimal,reflecting the uncertain nature of these risks at this stage. Some high-level analysis and/or stress testing may havebeen carried out to assess the potential impact.

The Bank’s current key top and emerging risks are as follows:• Forward looking balance sheet position• Geopolitical risk• System resilience, Cyber threat and unauthorised access to systems• Increased regulatory scrutiny and efforts• IBOR transition and reform• Climate-related risk• People risk

Areas of special interest - IBOR Transition

The Financial Stability Board has observed that the decline in interbank short-term unsecured funding posesstructural risks for interest/profit rate benchmarks that reference these markets. In response, regulators and centralbanks in various jurisdictions have convened national working groups (NWGs) to identify replacement rates forthese interbank offer rates (Ibors) and, where appropriate, to facilitate an orderly transition to these rates.

Following the announcement by the UK’s Financial Conduct Authority in July 2017 that it will no longer persuadeor require banks to submit rates for Libor after 2021, the NWGs for the affected currencies were tasked withfacilitating an orderly transition of the relevant Libors to their chosen replacement rates. The euro NWG is alsoresponsible for facilitating an orderly transition of the Euro Overnight Index Average (Eonia) to the euro short-term rate (€STER) as a result of the determination that Eonia cannot be made to comply with the EuropeanBenchmark Regulations (BMR) and can therefore no longer be used beyond 2021. Although NWGs in otherjurisdictions have identified replacements for their respective Ibors, there is no intention for these benchmark ratesto be discontinued.

Given the current lack of alternatives, HSBC Group has an increasing portfolio of contracts referencing Libor andEonia with maturities beyond 2021. HSBC Group established the IBOR transition programme with the objectiveof facilitating an orderly transition from Libor and Eonia for HSBC Group and its clients. This global programmeoversees the transition effected by each of the global businesses and is led by the Group Chief Risk Officer.

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5 Risk (Cont’d)


(iv) Top and emerging risks management (Cont’d)

Areas of special interest (Cont’d)

IBOR Transition (Cont’d)

The programme is currently focused on developing alternative rate products, and the supporting processes andsystems, that reference the NWG-selected replacement rates and making them available to customers. Dependingon the take up of these products by customers, this should reduce the current growth in Libor and Eonia contractsbeing transacted with maturities beyond end 2021, while the new product capabilities will also enable the transitionof outstanding Libor and Eonia products onto the replacement rates. A structured development plan is requiredgiven the widespread use of Libor and Eonia in a wide range of products, systems and processes across each ofthe four global businesses and all of the jurisdictions in which HSBC Group operates, including the Group andthe Bank. The resulting execution risk is closely monitored by the programme.

The programme is concurrently developing the capability to transition, through repapering, outstanding Libor andEonia contracts. The process of implementing International Swaps and Derivatives Association’s (ISDA’s)proposed protocol and transitioning outstanding contracts is nonetheless a material undertaking for the industry asa whole and may expose HSBC Group to the risk of financial losses.

HSBC Group intends to actively engage in the process to achieve an orderly transition of HSBC Group’s Liborand Eonia bond issuance, HSBC Group’s holdings of Libor/Eonia bonds and of those bonds where HSBC Groupis the payment agent. At this stage HSBC Group is confident of transitioning the bulk of these exposures and isactively engaged in industry working groups.

Although HSBC Group has plans to transition multi-billion dollar contractually IBOR-referenced commercialfinancings onto replacement rates, the ability to transition this portfolio by the end of 2021 is materially dependenton the availability of products that reference the replacement rates and on customers being ready and able to adapttheir own processes and systems to accommodate the replacement products. This may give rise to an elevatedlevel of conduct related risks. HSBC Group is engaging with impacted clients to ensure that customers are awareof the risks associated with the ongoing purchase of Libor and Eonia referencing contracts as well as the need totransition legacy contracts prior to the end of 2021.

In addition to the execution and conduct risk previously highlighted, the process of adopting new reference ratesmay expose HSBC Group to an increased level of operational and financial risks, such as potential earningsvolatility resulting from contract modifications, changes in hedge accounting and a large volume of product andassociated process changes. Furthermore, the transition to alternative reference rates could have a range of adverseimpacts on our business, including legal proceedings or other actions regarding the interpretation andenforceability of provisions in IBOR-based contracts, and regulatory investigations or reviews in respect of ourpreparation and readiness for the replacement of IBOR with alternative reference rates. The Bank continues toengage with industry participants, the official sector and their clients to support an orderly transition and themitigation of the risks resulting from the transition.

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5 Risk (Cont’d)


(v) Material banking risks

All of the Bank’s activities involve analysis, evaluation, acceptance and management of some degree of risk orcombination of risks. The Bank has exposure to the following risks from financial instruments:

• credit risk

• liquidity and funding risk

• market risks (includes foreign exchange, profit rate and basis risk)

• resilience risk

• regulatory compliance risk

• financial crime and fraud risk

• model risk

This note presents information about the Bank’s exposure to each of the above risks as well as the objectives,policies and processes for measuring and managing those risks.

b) Credit risk management

(i) Overview

Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract.Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products,such as guarantees and credit derivatives.

(ii) Credit risk management framework

Key developments 2019

There were no material changes to the policies and practices for the management of credit risk in 2019. We continuedto apply the requirements of MFRS 9 ‘Financial Instruments’ within Credit Risk.

Governance and structure

The Bank has established credit risk management and related MFRS 9 processes. The Bank continues to activelyassess the impact of economic developments in key markets on specific customers, customer segments or portfolios.As credit conditions change, the Bank takes mitigating action, including the revision of risk appetites or limits andtenors, as appropriate. In addition, the Bank continues to evaluate the terms under which credit facilities are providedwithin the context of individual customer requirements, the quality of the relationship, regulatory requirements,market practices and the Bank’s market position.

(iii) Credit risk sub-function

Credit approval authorities are delegated by the Board to the Chief Executive (CEO) together with the authority tosub-delegate them. The Credit Risk sub-function in Global Risk at HSBC Group is responsible for the key policiesand processes for managing credit risk, which include formulating credit policies and risk rating frameworks, guidingthe Bank’s appetite for credit risk exposures, undertaking independent reviews and objective assessment of creditrisk, and monitoring performance and management of portfolios.

The principal objectives of credit risk management are:- to maintain a strong culture of responsible lending, and robust risk policies and control frameworks;- to both partner and challenge businesses in defining, implementing and continually re-evaluating risk appetite

under actual and scenario conditions; and- to ensure there is independent, expert scrutiny of credit risks, their costs and their mitigation.

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5 Risk (Cont’d)

b) Credit risk management (Cont’d)

(iii) Credit risk sub-function (Cont’d)

Key risk management processes

MFRS 9 ‘Financial Instruments’ process

The MFRS 9 process comprises three main areas: modelling and data; implementation; and governance.

• Modelling and dataTo address the MFRS 9 requirements, the Bank has established modelling and data processes in variousgeographies which are subject to internal model risk governance including independent review of significantmodel developments.

• ImplementationA centralised impairment engine performs the expected credit loss (ECL) calculation using data, which is subjectto a number of validation checks and enhancements, from a variety of client, finance and risk systems. Wherepossible, these checks and processes are performed in a globally consistent and centralised manner.

• GovernanceManagement review forums are established both in regions and sites in order to review and approve theimpairment results. The management review forums have representatives from Credit Risk and Finance. The siteand regional approvals are reported up to the global business impairment committee for final approval of theBank’s ECL for the period. Required members of the forum at site level are the Chief Risk Officer, heads ofWholesale Credit, Market Risk, and Retail Banking and Wealth Management (RBWM) Risk, as well as the ChiefFinancial Officer and the Financial Controller.

Concentration of exposure

Concentrations of credit risk arise when a number of counterparties or exposures have comparable economiccharacteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas orindustry sectors so that their collective ability to meet contractual obligations is uniformly affected by changes ineconomic, political or other conditions. The Bank uses a number of controls and measures to minimise undueconcentration of exposure in portfolios across industries, countries and global businesses. These include portfolioand counterparty limits, approval and review controls, and stress testing.

The Bank monitors concentration of credit risk by sector and geographical location. The analysis of concentrationof credit risk from financing and advances is shown in Notes 11(v) and 11(vii). The analysis of concentration ofcredit risk from the Bank’s financial assets is shown in Note 5(b)(vi).

Credit quality of financial instruments

The Bank’s risk rating system facilitates the internal ratings-based approach under the adopted Basel framework tosupport the calculation of minimum credit regulatory capital requirement. The five credit quality classifications eachencompass a range of granular internal credit rating grades assigned to wholesale and retail lending businesses, andthe external ratings attributed by external agencies to debt securities. For debt securities and certain other financialinstruments, external ratings have been aligned to the five quality classifications based upon the mapping of relatedcustomer risk rating (CRR) to external credit rating.

• Wholesale lendingThe CRR 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of default(PD). All corporate customers are rated using the 10- or 23-grade scale, depending on the degree of sophisticationof the Basel approach adopted for the exposure. Each CRR band is associated with an external rating grade byreference to long-run default rates for that grade, represented by the average of issuer-weighted historical defaultrates. This mapping between internal and external ratings is indicative and may vary over time.

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5 Risk (Cont’d)


(iii) Credit risk sub-function (Cont’d)

Key risk management processes (Cont’d)

Credit quality of financial instruments (Cont’d)

• Retail lendingRetail lending credit quality is based on a 12-month point-in-time (PIT) probability-weighted probability ofdefault (PD).

• Credit quality classification

Credit quality of the debt securities and other bills External CreditRating[1]

Strong A- and aboveGood BBB+ to BBB-Satisfactory BB+ to B and unratedSub-standard B- to CImpaired D

Credit quality of the corporate lending/derivative financial assets/securities purchased under resale agreements/deposits and placements with banks and Internal Credit

12-month Baselprobability of

other financial institutions Rating default %Strong CRR1 - CRR2 0.000–0.169Good CRR3 0.170–0.740Satisfactory CRR4 - CRR5 0.741–4.914Sub-standard CRR6 - CRR8 4.915–99.999Impaired CRR9 - CRR10 100

Credit quality of the retail lending Internal CreditRating

12-month Baselprobability of

default %

Strong Band 1 and 2 0.000–0.500Medium-good Band 3 0.501–1.500Medium-satisfactory Band 4 and 5 1.501–20.000Sub-standard Band 6 20.001-99.999Impaired Band 7 100

[1] External ratings have been aligned to the five quality classifications. The ratings of Standard and Poor's arecited, with those of other agencies being treated equivalently.

Quality classification definitions:

• ‘Strong’ exposures demonstrate a strong capacity to meet financial commitments, with negligible or lowprobability of default and/or low levels of expected loss.

• ‘Good’ exposures demonstrate a good capacity to meet financial commitments, with low default risk.• ‘Satisfactory’ exposures require closer monitoring and demonstrate an average to fair capacity to meet

financial commitments, with moderate default risk.• ‘Sub-standard’ exposures require varying degrees of special attention and default risk is of greater concern.• ‘Credit-impaired’ exposures have been assessed as impaired.

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5 Risk (Cont’d)


(iii) Credit risk management framework (Cont’d)


Renegotiated financings and forbearance

‘Forbearance’ describes concessions made on the contractual terms of a financing in response to an obligor’sfinancial difficulties.

A financing and advances is classed as ‘renegotiated’ when we modify the contractual payment terms onconcessionary terms because we have significant concerns about the borrowers’ ability to meet contractual paymentswhen due.

Non-payment-related concessions (e.g. covenant waivers), while potential indicators of impairment, do not triggeridentification as renegotiated financings.

Financing and advances that have been identified as renegotiated retain this designation until maturity orderecognition. For details of the policy on derecognised renegotiated financings, see Note 4(k)(iii).

• Credit quality of renegotiated financings

On execution of a renegotiation, the financing will also be classified as credit impaired if it is not already soclassified. In wholesale lending, all facilities with a customer, including financings that have not been modified,are considered credit impaired following the identification of a renegotiated financing.

Wholesale renegotiated financings are classified as credit-impaired until there is sufficient evidence todemonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimumone-year period, and there are no other indicators of impairment. Personal renegotiated financings are deemedto remain credit impaired until repayment or derecognition.

• Renegotiated financings and recognition of expected credit losses

For retail lending, unsecured renegotiated financings are generally segmented from other parts of the financingportfolio. Renegotiated expected credit loss assessments reflect the higher rates of losses typically encounteredwith renegotiated financings. For wholesale lending, renegotiated financings are typically assessed individually.Credit risk ratings are intrinsic to the impairment assessments. The individual impairment assessment takes intoaccount the higher risk of the future non-payment inherent in renegotiated financings.

Impairment assessment

For details of impairment policies on financing and advances and financial investments, see Note 4(k).

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5 Risk (Cont’d)


(iii) Credit risk management framework (Cont’d)


Write-off of financing and advances

For details of policy on the write-off of financing and advances, see Note 4(k)(ii).

Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due.The standard period runs until the end of the month in which the account becomes 180 days contractually delinquent.Write-off periods may be extended, generally to no more than 360 days past due. However, in exceptionalcircumstances, they may be extended further.

For secured facilities, write-off should occur upon repossession of collateral, receipt of proceeds via settlement, ordetermination that recovery of the collateral will not be pursued. Any secured assets maintained on the balance sheetbeyond 60 months of consecutive delinquency-driven default require additional monitoring and review to assess theprospect of recovery.

In the event of bankruptcy or analogous proceedings, write-off may occur earlier than the maximum periods statedabove. Collection procedures may continue after write-off.

(iv) Credit risk profile

The financial assets recorded in each stage have the following characteristics:

Stage 1: These financial assets are unimpaired and without significant increase in credit risk on which a 12-monthallowance for ECL is recognised.

Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognitionfor which a lifetime ECL is recognised.

Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in defaultor otherwise credit impaired on which a lifetime ECL is recognised.

Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in creditrisk when they are 30 days past due (DPD) and are transferred from stage 1 to stage 2.

(v) Credit deterioration of financial instruments

Measurement uncertainty and sensitivity analysis of ECL estimates

The recognition and measurement of expected credit losses (ECL) involves the use of significant judgment andestimation. We form multiple economic scenarios based on economic forecasts, apply these assumptions tocredit risk models to estimate future credit losses, and probability-weight the results to determine an unbiasedECL estimate.

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5 Risk (Cont’d)


(v) Credit deterioration of financial instruments (Cont’d)

Methodology for developing forward looking economic scenarios

The Bank has adopted the use of multiple scenarios, representative of their view of forecast economicconditions, sufficient to calculate unbiased expected loss in most economic environments.

We rely on an average of external forecasts and their distributions to create three scenarios that represent a’most likely outcome’, the Central scenario, and two less likely outcomes, referred to as the Upside andDownside scenarios. Each outer scenario is consistent with a probability of 10%, while the Central scenario isassigned the remaining 80%, according to the decision of the senior management. This weighting scheme isdeemed appropriate for the unbiased estimation of ECL in most circumstances. These three scenarios arereferred to as the ‘consensus economic scenarios. Additional scenarios are used to specifically address theforward looking risks that management consider are not adequately captured by the consensus. Together, thesescenarios represent our approach to forward economic guidance.

Economic assumptions in the Central consensus economic scenario are set using consensus forecasts whichrepresent the average of forecasts of external economists. Reliance on external forecasts helps ensure that theCentral scenario is unbiased and maximises the use of independent information. The Upside and Downsidescenarios are selected with reference to externally available forecast distributions and are designed to becyclical, in that GDP growth, inflation and unemployment usually revert back to the Central scenario after thefirst three years for major economies. We determine the maximum divergence of GDP growth from the Centralscenario using the 10th and the 90th percentile of the entire distribution of forecast outcomes for majoreconomies. While key economic variables are set with reference to external distributional forecasts, we alsoalign the overall narrative of the scenarios to the macroeconomic risks described in the ‘Top and Emergingrisks’. This ensures that scenarios remain consistent with the more qualitative assessment of these risks. Weproject additional variable paths using an external provider’s global macro model.

The Upside and Downside scenarios are generated once a year, reviewed at each reporting date to ensure that theyare an appropriate reflection of managements view and updated if economic conditions change significantly. TheCentral scenario is generated every quarter. For quarters without updates to outer scenarios, wholesale and retailcredit risk use the updated central scenario to approximate the impact of the most recent outer scenarios.

Additional scenarios are created as required, to address those forward-looking risks that management consider arenot adequately captured by the consensus.

The following table describes key macroeconomic variables and the probabilities assigned in the Consensus Central,Upside and Downside scenarios.

2019 2018Scenario Scenario

Central(%)

Upside(%)

Downside(%)

Central(%)

Upside(%)

Downside(%)

GDP growth rate 4.6 5.2 4.0 4.8 5.2 4.4Inflation 2.4 2.7 2.1 2.4 2.7 2.1Unemployment 3.2 3.0 3.4 3.2 3.0 3.4Short term profit rate 2.9 3.0 2.6 3.9 4.1 2.7Property price growth 3.3 3.9 2.5 5.8 6.3 4.6Probability 80.0 10.0 10.0 80.0 10.0 10.0

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5 Risk (Cont’d)



How economic scenarios are reflected in the Wholesale calculation of ECL

HSBC Group has developed a globally consistent methodology for the application of forward economic guidanceinto the calculation of ECL by incorporating forward economic guidance into the estimation of the term structure ofprobability of default (PD) and loss given default (LGD). For PDs, the correlation of forward economic guidance todefault rates is considered for a particular industry in a country. For LGD calculations the correlation of forwardeconomic guidance to collateral values and realisation rates is considered for a particular country and industry. PDsand LGDs are estimated for the entire term structure of each instrument.

For impaired financings, LGD estimates take into account independent recovery valuations provided by externalconsultants where available, or internal forecasts corresponding to anticipated economic conditions and individualcompany conditions. In estimating the ECL on impaired financings that are individually considered not to besignificant, HSBC Group incorporates FEG proportionate to the probability-weighted outcome and the Centralscenario outcome for non-stage 3 populations.

How economic scenarios are reflected in the Retail calculation of ECL

HSBC Group has developed and implemented a globally consistent methodology for incorporating forecasts ofeconomic conditions into ECL estimates. The impact of economic scenarios on PD is modelled at a portfolio level.Historic relationships between observed default rates and macro-economic variables are integrated into HKFRS 9ECL estimates by leveraging economic response models. The impact of these scenarios on PD is modelled over aperiod equal to the remaining maturity of underlying asset or assets. The impact on LGD is modelled for housefinancing portfolios by forecasting future financing-to-value (FTV) profiles for the remaining maturity of the assetby leveraging national level forecasts of the house price index and applying the corresponding LGD expectation.

Economic scenarios sensitivity analysis of ECL estimates

Management assessed and considered the sensitivity of the ECL outcome against the forward-looking economicconditions as part of the ECL governance process by recalculating the ECL under each scenario described above forselected portfolios, applying a 100% weighting to each scenario in turn. The weighting is reflected in both thedetermination of significant increase in credit risk as well as the measurement of the resulting ECL.

The ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lowerlimits of possible actual ECL outcomes. The impact of defaults that might occur in future under different economicscenarios is captured by recalculating ECL for financings in stages 1 and 2 at the balance sheet date. The populationof stage 3 financings (in default) at the balance sheet date is unchanged in these sensitivity calculations. Stage 3ECL would only be sensitive to changes in forecasts of future economic conditions if the LGD of a particularportfolio was sensitive to these changes.

There is a particularly high degree of estimation uncertainty in numbers representing tail risk scenarios whenassigned a 100% weighting.

For wholesale credit risk exposures, the sensitivity analysis excludes ECL and financial instruments related todefaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to theobligor than future economic scenarios, and it is impracticable to separate the effect of macro-economic factors inindividual assessments.

For retail credit risk exposures, the sensitivity analysis includes ECL for financing and advances to customersrelated to defaulted obligors as the retail ECL is sensitive to macroeconomic variables which are incorporatedinto the future economic scenarios. The population of stage 3 financings at the balance sheet date is determinedat that point in time. The impact on ECL of exposures moving from stage 1 (12-month provisioning) to alifetime provisioning stage (and vice versa) as well as changes in ECL for existing stages 1 and 2 financingsas a result of changes in forecasts of future economic conditions is captured in sensitivity analysis byrecalculating the ECL for stages 1 and 2, reflecting changes in the population of financings in each stage andtheir PD.

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5 Risk (Cont’d)



For retail credit risk exposures, the sensitivity analysis includes ECL for financing and advances to customersrelated to defaulted obligors as the retail ECL is sensitive to macroeconomic variables which are incorporatedinto the future economic scenarios. The population of stage 3 financings at the balance sheet date is determinedat that point in time. The impact on ECL of exposures moving from stage 1 (12-month provisioning) to alifetime provisioning stage (and vice versa) as well as changes in ECL for existing stages 1 and 2 financingsas a result of changes in forecasts of future economic conditions is captured in sensitivity analysis byrecalculating the ECL for stages 1 and 2, reflecting changes in the population of financings in each stage andtheir PD.

Wholesale analysis

MFRS 9 ECL sensitivity to future economic conditions [1]

ECL coverage of financial instruments subject to significantmeasurement uncertainty [2]

31 Dec 2019 31 Dec 2018

Reported ECL (RM’000) 10,864 9,571Gross carrying/nominal amount [3] (RM’000) 17,934,219 17,761,327Reported ECL Coverage (%) 0.06 % 0.05 %Coverage Ratios by Scenario (%)

Consensus central scenario 0.06 % 0.05 %Consensus upside scenario 0.06 % 0.05 %Consensus downside scenario 0.07 % 0.06 %

[1]Excludes ECL and financial instruments relating to defaulted obligors because the measurement of ECL is relatively more sensitive to creditfactors specific to the obligor then future economic scenario.

[2]Includes off balance sheet financial instruments that are subject to significant measurement uncertainty.[3]Includes low credit risk financial instruments such as Debt instruments at FVOCI which have low ECL coverage ratios under all the above

scenarios. Coverage ratios on financing and advances to customers including financing commitments and financial guarantees are typicallyhigher.

ECL coverage rates reflect the underlying observed credit defaults, the sensitivity to economic environment,extent of security and the effective maturity of the book.

Retail analysis

MFRS 9 ECL sensitivity to future economic conditions [1]

ECL coverage of financing and advances[2] 31 Dec 2019 31 Dec 2018Reported ECL (RM’000) 200,597 184,650Gross Carrying Amount (RM’000) 6,339,638 6,345,715Reported ECL Coverage (%) 3.16 % 2.91 %Coverage Ratios by Scenario (%)

Consensus central scenario 3.16 % 2.89 %Consensus upside scenario 2.84 % 2.60 %Consensus downside scenario 3.57 % 3.22 %

[1]ECL sensitivities excludes portfolios utilising less complex modelling approaches.[2]ECL sensitivity includes only on balance sheet financial instruments to which MFRS 9 impairment requirements are applied.

The changes in sensitivity from 31 December 2018 is reflective of changes in lending volumes, credit quality andmovements in foreign exchange.

76



5 Risk (Cont’d)



Post-model adjustments

In the context of MFRS 9, post-model adjustments are short-term increases or decreases to the expectedcredit loss at either a customer or portfolio level to account for model deficiencies, expert credit judgmentapplied following management review and challenge and for any late breaking events. Internal governanceis in place to regularly monitor post-model adjustments and where possible to reduce the reliance on thesethrough model recalibration or redevelopment as appropriate.

(vi) Credit quality

Credit quality of financial instruments

The Bank assess credit quality of all financial instruments that are subject to credit risk. The credit quality of financialinstruments is a point in time assessment of the probability of default of financial instruments, whereas MFRS 9stages 1 and 2 are determined based on relative deterioration of credit quality since initial recognition. Accordingly,for non-credit impaired financial instruments, there is no direct relationship between the credit quality assessmentand MFRS 9 stages 1 and 2, though typically the lower credit quality bands exhibit a higher proportion in stage 2.

The five credit quality classifications each encompass a range of granular internal credit rating grades assigned towholesale and retail lending businesses and the external ratings attributed by external agencies to debt securities, asshown in the table below.

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5 Risk (Cont'd)

b) Credit Risk Management (Cont'd)

(vi) Credit quality (Cont’d)

Distribution of financial assets by credit quality

(RM'000) Strong Good Satisfactory Sub-standard Credit Impaired Total

At 31 December 2019Cash and short-term funds 4,781,970 - - - - 4,781,970 (6) 4,781,964Deposits and placements with banks and

other financial institutions 139,153 - - - - 139,153 - 139,153Financial assets at FVOCI 2,719,975 - - - - 2,719,975 - 2,719,975Financing and advances to customers held

at amortised cost 3,267,622 4,814,554 4,361,508 471,231 385,303 13,300,218 (257,265) 13,042,953of which:- retail 1,626,803 2,396,952 2,171,400 234,605 290,282 6,720,042 (205,771) 6,514,271

- corporate and commercial 1,640,819 2,417,602 2,190,108 236,626 95,021 6,580,176 (51,494) 6,528,682Derivatives financial assets 78,979 41,786 4,909 - - 125,674 - 125,674Other financial assets 33,317 - - - - 33,317 - 33,317Irrevocable financing commitments and

financial guarantees 4,219,000 1,061,000 1,844,000 92,000 2,000 7,218,000 (2,552) 7,215,448

(RM'000) Strong Good Satisfactory Sub-standard Credit Impaired Total

At 31 December 2018Cash and short-term funds 2,804,496 - - - - 2,804,496 (2) 2,804,494Financial assets at FVOCI 2,725,683 - - - - 2,725,683 - 2,725,683Financing and advances to customers held

at amortised cost 3,546,096 5,224,863 4,733,208 511,391 356,312 14,371,870 (234,533) 14,137,337of which:- retail 1,635,331 2,409,517 2,182,784 235,835 263,050 6,726,517 (188,342) 6,538,175- corporate and commercial 1,910,765 2,815,346 2,550,424 275,556 93,262 7,645,353 (46,191) 7,599,162

Derivatives financial assets 81,907 9 160,325 43 - 242,284 - 242,284Other financial assets 33,097 - - - - 33,097 - 33,097Irrevocable financing commitments and

financial guarantees 3,296,000 2,321,000 1,284,000 133,000 3,000 7,037,000 (2,859) 7,034,141

Gross Carrying Amount ECLallowances

Carrying amount (net ofimpairment provision)

Gross Carrying Amount ECLallowances

Carrying amount (net ofimpairment provision)

78



5 Risk (Cont’d)


(vi) Credit quality (Cont’d)

Credit impaired financings (Stage 3)

The Bank determines that a financial instrument is credit impaired and in stage 3 by considering relevant objectiveevidence, primarily whether:

• contractual payments of either principal or profit are past due for more than 90 days;

• there are other indications that the borrower is unlikely to pay, such as when a concession has been granted tothe borrower for economic or legal reasons relating to the borrower’s financial condition; and

• the financing and advances is otherwise considered to be in default. If such unlikeliness to pay is not identifiedat an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rulespermit default to be defined based on 180 days past due. Therefore, the definitions of credit impaired and defaultare aligned as far as possible so that stage 3 represents all financing and advances that are considered defaultedor otherwise credit impaired.

Collateral and other credit enhancements

Although collateral can be an important mitigant of credit risk, it is the Bank’s general practice to lend on the basisof the customer’s ability to meet their obligations out of their cash flow resources rather than rely on the value ofsecurity offered. Depending on the customer’s standing and the type of product, facilities may be providedunsecured. For other lending, a charge over collateral is obtained and considered in determining the credit decisionand pricing. In the event of default, the bank may use the collateral as a source of repayment.

The Bank does not disclose the fair value of collateral held as security or other credit enhancements on financingand advances and past due but not impaired, or on individually assessed financing and advances as it is notpracticable to do so.

The financial effect of collateral (quantification of the extent to which collateral and other credit enhancementsmitigate credit risk) held for impaired advances and financing for the Bank as at 31 December 2019 are 50.9% (2018:48.1%). The financial effect of collateral held for other remaining on-balance sheet financial assets is not significant.

Collateral especially properties are made available for sale in an orderly fashion, with the proceeds used to reduceor repay the outstanding indebtedness. If excess funds arise after the debt/financing has been repaid, they are madeavailable either to repay other secured lenders/financier with lower priority or are returned to the customer. TheBank does not generally occupy repossessed properties for its business use.

Derivatives

As part of the risk management practices arising from derivatives activity, the Bank will enter into legallyenforceable arrangements with its counterparties. The Bank will either (a) enter into a master agreement which (i)provides for a contractual framework within which dealing activity across a full range of OTC products is conducted,and (ii) contractually binds both parties to apply close-out netting across all outstanding transactions covered by themaster agreement if either party defaults or another pre-agreed termination event occurs, or (b) specifically in respectof FX forward-i only, the Bank will enter into a master Wa’ad (undertaking) arrangement with its counterparties.

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5 Risk (Cont'd)

b) Credit Risk Management (Cont'd)

(vi) Credit quality (Cont'd)

Offsetting financial assets and liabilities

(i) (ii) (iii) = (i) + (ii) (iv)a (iv)b (v) = (iii) - (iv)

Description

Financialinstruments Cash collateral

RM'000 RM'000 RM'000 RM'000 RM'000 RM'0002019

BankDerivative financial assets 125,674 - 125,674 - - 125,674Derivative financial liabilities 79,721 - 79,721 - - 79,721

2018

BankDerivative financial assets 242,284 - 242,284 - - 242,284Derivative financial liabilities 227,330 - 227,330 - - 227,330

The disclosures set out in the table below include financial assets and financial liabilities that are subject to an enforceable master netting agreement, irrespective of whether they are

offset in the statement of financial position. Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position when there is a legally

enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and liability simultaneously (the offset criteria). During the

financial year, no financial assets or financial liabilities were offset in the statement of financial position because the master agreement or master Wa’ad referred to in para (ix) above do

not meet the criteria for offsetting in the statement of financial position. The master agreement or master Wa’ad referred to in para (ix) above create for the parties to the agreement, a

right of set off of recognised amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Bank, or its counterparties. Financial instruments subject to

offsetting, enforceable master netting agreements and similar agreements are shown as follows:

Gross amounts ofrecognised assets

Gross amounts offsetin the statement of

financial position

Net amount of assetspresented in the

statement offinancial position Net amount

Gross amounts not offset in thestatement of financial position

80



5 Risk (Cont’d)

c) Liquidity and funding risk management

Liquidity risk is the risk that the Bank does not have sufficient financial resources to meet their obligations as

they fall due or that it can only be done at an excessive cost. Liquidity risk arises from mismatches in the timing

of cash flows. Funding risk is the risk that funding considered to be sustainable, and therefore used to fund assets,

is not sustainable over time. Funding risk arises when illiquid asset positions cannot be funded at the expected

terms and when required.

The Bank maintains a diversified and stable funding base comprising core retail and corporate customer deposits

and institutional balances. This is augmented by wholesale funding and portfolios of highly liquid assets. The

objective of the Bank’s liquidity and funding management is to ensure that all foreseeable funding commitments

and deposit withdrawals can be met when due and that wholesale market access is coordinated and cost effective.

Current accounts and savings deposits payable on demand or at short notice form a significant part of HSBC

Group’s funding, and the Bank places considerable importance on maintaining their stability. For deposits,

stability depends upon preserving depositor confidence in the Bank’s capital strength and liquidity, and on

competitive and transparent pricing. In aggregate, the Bank are net liquidity providers to the interbank market,

placing significantly more funds with other banks than it borrows.

The management of liquidity and funding is primarily carried out through HSBC Group’s liquidity and funding

risk framework (LFRF) and BNM’s Liquidity Coverage Ratio Framework. Limits are proposed by Asset, Liability

and Capital Management (ALCM) through the RMM and approved by the Board. These limits vary to take

account of the depth and liquidity of the local market in which the Bank operates. The Bank maintains strong

liquidity positions and manage the liquidity profile of the assets, liabilities and commitments to ensure that cash

flows are appropriately balanced and all obligations are met when due.

The Asset and Liability Committee (ALCO) is responsible for managing all ALCM issues including liquidity andfunding risk management. Compliance with liquidity and funding requirements is monitored by ALCO throughthe following processes:• maintaining compliance with relevant regulatory requirements of the operating entity;• projecting cash flows under various stress scenarios and considering the level of liquid assets necessary in

relation thereto;

• monitoring liquidity and funding ratios against internal and regulatory requirements;

• maintaining a diverse range of funding sources with adequate back-up facilities;

• managing the concentration and profile of term funding;

• managing contingent liquidity commitment exposures within predetermined limits;

• maintaining debt financing plans;

• monitoring of depositor concentration in order to avoid undue reliance on large individual depositors and

ensuring a satisfactory overall funding mix; and

• maintaining liquidity and funding contingency plans. These plans identify early indicators of stress conditions

and describe actions to be taken in the event of difficulties arising from systemic or other crises, while

minimising adverse long-term implications for the business.

The HSBC Group’s LFRF uses the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) regulatoryframework as a foundation, but adds extra metrics, limits and overlays to address the risks that are considered notadequately reflected by the regulatory framework.

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5 Risk (Cont'd)

c) Liquidity and funding risk management (Cont’d)

(i) Liquidity risk

Non-Up to >1 - 3 >3 - 12 1 - 5 Over 5 specific Trading

31 December 2019 1 month months months years years maturity book TotalRM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

ASSETS

Cash and short-term funds 4,781,964 - - - - - - 4,781,964

Deposits and placements with banks

and other financial institutions - 139,153 - - - - - 139,153

Financial investments at FVOCI - - 1,700,589 1,019,386 - - - 2,719,975

Financing and advances 2,707,709 1,274,278 468,944 2,740,686 5,851,336 - - 13,042,953

Derivative financial assets - - - - - - 125,674 125,674

Others 3,778 241 13,080 26,298 8,191 377,724 - 429,312

Total Assets 7,493,451 1,413,672 2,182,613 3,786,370 5,859,527 377,724 125,674 21,239,031

LIABILITIES AND EQUITY

Deposits from customers 8,490,873 2,242,725 2,271,553 314,809 373 - - 13,320,333

Deposits and placements from banks

and other financial institutions 1,451,008 300,623 387,778 200,545 - - - 2,339,954

Structured liabilities designated as FVTPL 18,429 123,786 441,044 682,341 29,758 - - 1,295,358

Bills payable 22,036 - - - - - - 22,036

Multi-Currency Sukuk Programme - 751,732 - 514,197 - - - 1,265,929

Subordinated Commodity Murabahah

Financing - - - 317,957 271,655 - - 589,612

Derivative financial liabilities - - - - - - 79,721 79,721

Others 81,937 30,448 24,147 13,999 58 204,718 96 355,403

Total Liabilities 10,064,283 3,449,314 3,124,522 2,043,848 301,844 204,718 79,817 19,268,346

Equity - - - - - 1,970,685 - 1,970,685

Total Liabilities and Equity 10,064,283 3,449,314 3,124,522 2,043,848 301,844 2,175,403 79,817 21,239,031

Net maturity mismatches (2,570,832) (2,035,642) (941,909) 1,742,522 5,557,683 (1,797,679) 45,857 -

Off balance sheet liabilities 11,099,980 2,719,656 4,802,513 2,215,888 15,990 - - 20,854,027

Non-trading book

The following tables summarise the Bank's exposure to liquidity risk. The asset and liabilities at carrying amount are allocated to time bands by reference to the

remaining contractual maturity and/or their behavioural profile.

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5 Risk (Cont'd)


(i) Liquidity risk (Cont'd)

Non-Up to >1 - 3 >3 - 12 1 - 5 Over 5 specific Trading

31 December 2018 1 month months months years years maturity book TotalRM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

ASSETS

Cash and short-term funds 2,804,494 - - - - - - 2,804,494

Financial investments at FVOCI - 199,314 741,131 1,785,238 - - - 2,725,683

Financing and advances 3,013,962 1,502,192 1,287,475 2,421,226 5,912,482 - - 14,137,337

Derivative financial assets - - - - - - 242,284 242,284

Others 587 - 6,314 14,842 - 414,383 3,431 439,557

Total Assets 5,819,043 1,701,506 2,034,920 4,221,306 5,912,482 414,383 245,715 20,349,355

LIABILITIES AND EQUITY

Deposits from customers 6,443,475 2,251,387 2,409,787 339,898 30 - - 11,444,577

Deposits and placements from banks

and other financial institutions 988,238 275,195 630,865 1,405,666 - - - 3,299,964

Structured liabilities designated as FVTPL - - 129,938 747,422 7,517 - - 884,877

Bills payable 18,594 - - - - - - 18,594

Multi-Currency Sukuk Programme - - 501,173 1,254,108 - - - 1,755,281

Subordinated Commodity Murabahah

Financing - - - - 595,987 - - 595,987

Derivative financial liabilities 56 - - - - - 227,274 227,330

Others 98,088 19,887 27,227 22,765 307 132,206 - 300,480

Total Liabilities 7,548,451 2,546,469 3,698,990 3,769,859 603,841 132,206 227,274 18,527,090

Equity - - - - - 1,822,265 - 1,822,265

Total Liabilities and Equity 7,548,451 2,546,469 3,698,990 3,769,859 603,841 1,954,471 227,274 20,349,355

Net maturity mismatches (1,729,408) (844,963) (1,664,070) 451,447 5,308,641 (1,540,088) 18,441 -

Off balance sheet liabilities 10,622,773 1,702,398 7,166,015 3,420,467 251,255 - - 23,162,908

Non-trading book

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200801006421 (807705-X)


5 Risk (Cont'd)


(ii) Cash flows payable by the Bank under financial liabilities by remaining contractual maturities

On Demand

Due within 3

months

Due between

3 months to

12 months

Due between

1 and 5 years

Due after 5

years Total

5,377,847 5,415,068 2,307,458 346,466 - 13,446,839Deposits and placements from banks and

other financial institutions - 1,781,942 368,056 216,106 3,929 2,370,033Structured liabilities designated at fair value

through profit or loss (FVTPL) 16,811 113,367 508,846 695,156 - 1,334,18022,036 - - - - 22,036

- 760,571 21,559 564,500 - 1,346,630

financing - 7,121 21,785 421,639 281,109 731,65483,866 47,049 26,305 26,990 156,760 340,970

Financing and other credit-relatedcommitments 7,115,715 118,261 925,846 224,871 - 8,384,693

198,355 235,188 872,149 485,408 15,990 1,807,09012,814,630 8,478,567 5,052,004 2,981,136 457,788 29,784,125

Gross settled derivatives

- Inflow - (3,898,629) (1,181,213) - - (5,079,842)- Outflow - 3,919,090 1,241,944 124 - 5,161,158Net settled derivatives - 144 361 827 - 1,332

On Demand

Due within 3

months

Due between

3 months to

12 months

Due between

1 and 5 years

Due after 5

years Total

3,655,489 5,151,954 2,390,848 387,006 - 11,585,297Deposits and placements from banks and

other financial institutions - 1,270,508 641,464 1,531,614 - 3,443,586Structured liabilities designated at fair value

through profit or loss (FVTPL) - - 118,461 839,711 - 958,17218,594 - - - - 18,594

- 10,513 553,287 1,346,630 - 1,910,430

financing - 7,153 21,861 113,166 626,400 768,580106,310 41,009 20,715 3,350 85,241 256,625

Financing and other credit-relatedcommitments 6,746,349 181,241 1,532,485 65,446 - 8,525,521

76,439 215,209 707,739 675,607 18,510 1,693,50410,603,181 6,877,587 5,986,860 4,962,530 730,151 29,160,309

Gross settled derivatives

- Inflow - (2,897,779) (1,672,299) (308,571) - (4,878,649)- Outflow - 2,923,806 1,825,294 355,936 - 5,105,036Net settled derivatives - 299 631 - - 930

Other liabilities

RM'000

At 31 December 2019Non-derivative liabilities

Deposits by customers

Bills payableMulti-Currency Sukuk ProgrammeSubordinated Commodity Murabahah

The balances in the tables below will not agree directly with the balances in the statement of financial position as the table incorporates, on

an undiscounted basis, all cash flows relating to principal and future coupon payments. In addition, financing and other credit-related

commitments and financial guarantees and similar contracts are generally not recognised on the statement of financial position.

Cash flows payable in respect of customer accounts are primarily contractually repayable on demand or at short notice. However, in practice,

short term deposit balances remain stable as inflows and outflows broadly match and a significant portion of financing commitments expire

without being drawn upon.

Derivative liabilities

Financial guarantees and similar contracts

Derivative liabilities

RM'000

At 31 December 2018Non-derivative liabilities

Deposits by customers

Bills payableMulti-Currency Sukuk ProgrammeSubordinated Commodity Murabahah

Other liabilities

Financial guarantees and similar contracts

84



5 Risk (Cont’d)

d) Market risk management

Market risk is the risk that movements in market risk factors, such as foreign exchange rates, profit rates, credit

spreads, equity prices and commodity prices, will reduce the Bank’s income or the value of its portfolios. Exposure

to market risk is separated into two portfolios: trading portfolios and non-trading portfolios.

Where appropriate, the Bank applies similar risk management policies and measurement techniques to both trading

and non-trading portfolios. The objective of the Bank’s market risk management is to manage and control market

risk exposures in order to optimise return on risk while maintaining a market profile consistent with HSBC

Group’s established risk appetite.

There were no material changes to the Bank’s policies and practices for the management of market risk in 2019.

The management of market risk is principally undertaken using risk limit mandates approved by HSBC’s Regional

and Global Wholesale Market Risk Management (WMR), an independent unit which develops HSBC Group’s

market risk management policies and measurement techniques. Market risks which arise on each product are

transferred to the Global Markets. The aim is to ensure that all market risks are consolidated within operations

which have the necessary skills, tools, management and governance to manage such risks professionally. Limits

are set for portfolios, products and risk types, with market liquidity and business need being the principal factor

in determining the level of limits set. The Bank has an independent product control function that is responsible for

measuring market risk exposures in accordance with the policies defined by WCMR. Positions are monitored daily

and excesses against the prescribed limits are reported immediately to local Senior Management and WMR.

Market risk in the trading portfolio is monitored and controlled at both portfolio and position levels using a

complementary set of techniques such as sensitivity analysis, value at risk (VAR) and stress testing. Other controls

to contain trading portfolio market risk at an acceptable level include rigorous new product approval procedures

and a list of permissible instruments to be traded.

(i) Sensitivity Analysis

Sensitivity analysis measures the impact of individual market factor movements on specific instruments or

portfolios including profit rates, foreign exchange rates and equity prices. Sensitivity measures are used to monitor

the market risk positions within each risk type.

Granular sensitivity limits are set primarily for trading desks with consideration of market liquidity, customer

demand and capital constraints, among other factors.

(ii) Value at risk (VAR)

VAR is a technique for estimating the potential losses on risk positions as a result of movements in market rates

and prices over a specified time horizon and to a given level of confidence. The use of VAR is integrated into

market risk management and is calculated for all trading positions regardless of how the Bank capitalises those

exposures. Where there is no approved internal model, the Bank uses the appropriate local rules to capitalise

exposures.

In addition, Bank calculates VAR for non-trading portfolios in order to have a complete picture of market risk.

Where VAR is not calculated explicitly, alternative tools are used as summarised in the Market Risk stress testing

section below.

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5 Risk (Cont’d)

d) Market risk management (Cont’d)

(ii) Value at risk (VAR) (Cont’d)

The VAR models used by the Bank is predominantly based on historical simulation which incorporate thefollowing features:

• historical market rates and prices are calculated with reference to foreign exchange rates and commodityprices, profit rates, equity prices and the associated volatilities;

• potential market movements utilised for VAR are calculated with reference to data from the past two years;and

• VAR measures are calculated to a 99 per cent confidence level and use a one-day holding period.

The models also incorporate the effect of option features on the underlying exposures. The nature of the VARmodels means that an increase in observed market volatility will lead to an increase in VAR without any changesin the underlying positions.

A summary of the VAR position of the Bank's trading portfolio at the reporting date is as follows:

RM'000 At 31 December 2019 Average Maximum Minimum

Foreign currency risk 41 39 188 5

Profit rate risk 117 112 294 46

Credit spread risk - 2 325 -

Overall 115 122 404 48

RM'000 At 31 December 2018 Average Maximum Minimum

Foreign currency risk 68 65 384 5

Profit rate risk 52 74 114 20

Credit spread risk - 6 93 -

Overall 77 109 385 34

Although a valuable guide to risk, VAR should always be viewed in the context of its limitations. For example:

• the use of historical data as a proxy for estimating future market moves may not encompass all potential

market events, particularly those that are extreme in nature;

• the use of a one-day holding period for risk management purposes of trading and non-trading books assumes

that this short period is sufficient to hedge or liquidate all positions.

• the use of a 99 per cent confidence level, by definition, does not take into account losses that might occur

beyond this level of confidence;

• VAR is calculated on the basis of exposures outstanding at the close of business and therefore does not reflect

intra-day exposures.

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5 Risk (Cont’d)


(iii) Exposure to profit rate risk – non trading portfolios

Banking book profit rate risk is the risk of an adverse impact to earnings or capital due to changes in market profitrates. The risk arises from timing mismatches in the repricing of non-traded assets and liabilities and is thepotential adverse impact of changes in profit rates on earnings and capital. In its management of the risk, the Bankaims to mitigate the impact of future profit rate movements which could reduce future net finance income, whilebalancing the cost of hedging activities to the current revenue stream. Monitoring the sensitivity of projected netfinance income under varying profit rate scenarios is a key part of this.

In order to manage structural profit rate risk, non-traded assets and liabilities are transferred to Balance SheetManagement (BSM) based on their repricing and maturity characteristics. For assets and liabilities with no definedmaturity or repricing characteristics, behaviouralisation is used to assess the profit rate risk profile. BSM managesthe banking book profit rate positions transferred to it within the approved limits. Local ALCOs are responsiblefor monitoring and reviewing their overall structural profit rate risk position. Profit rate behaviouralisation policieshave to be formulated in line with the Bank’s behaviouralisation policies.

The Bank manages market risk in non-trading portfolios by monitoring the sensitivity of projected net financeincome under varying profit rate scenarios (simulation modeling), where all other economic variables are heldconstant.

Sensitivity of net profit income reflects sensitivity of earnings due to changes in market profit rates. The Bank

forecast net finance income sensitivities across a range of profit rate scenarios based on a static balance sheet

assumption. This includes business line profit rate pass-on assumptions, re-investment of maturing assets and

liabilities at market rates per shock scenario and prepayment risk. BSM is modelled based on no management

actions i.e. the risk profile at the month end is assumed to remain constant throughout the forecast horizon.

The profit rate sensitivities set out in the table below are illustrative only and are based on simplified scenarios.

Sensitivity of projected Net Finance Income

Change in projected finance income in next 12 months arising from a shift in profit rates of:

RM’00031 Dec 19 31 Dec 18

Basis point parallel shift in yield curve +100bps -100bps +100bps -100bps

RM 17,680 (35,001) (14,977) 8,821USD (12,692) 10,457 12,756 (15,108)

Others 6,228 (5,880) 6,692 (8,568)11,216 (30,424) 4,471 (14,855)

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5 Risk (Cont’d)


(iii) Sensitivity of projected Net Finance Income (Cont’d)

Sensitivity of projected Economic value of equity

Change in projected economic value of equity arising from a shift in profit rates of:

RM’00031 Dec 19 31 Dec 18


RM (88,221) 104,135 (66,400) 82,614USD 1,017 (1,588) 3,242 (5,433)

Others (2,078) 1,770 564 10(89,282) 104,317 (62,594) 77,191

Sensitivity of reported reserves in "other comprehensive income" to profit rate movements

Sensitivity of reported reserves in "other comprehensive income" to profit rate movements are monitored on amonthly basis by assessing the expected reduction in valuation of FVOCI portfolios and cash flow hedges toparallel movements of plus or minus 100 basis points in all yield curves.

RM’00031 Dec 19 31 Dec 18


RM (25,449) 25,449 (36,330) 36,330

Foreign exchange risk

Foreign exchange risk arises as a result of movements in the relative value of currencies. The Bank controls theforeign exchange risk within the trading portfolio by limiting the open exposure to individual currencies, and onan aggregate basis.

RM’00031 Dec 19 31 Dec 18

Appreciation/depreciation +1% -1% +1% -1%

Impact to profit after income tax expense (53) 53 93 (93)

Change in foreign exchange rate has no significant impact to other comprehensive income for the financial yearended 31 December 2019 and 31 December 2018.

The Bank measures the foreign exchange sensitivity based on the foreign exchange net open positions (includingforeign exchange structural position) under an adverse movement in all foreign currencies against the functionalcurrency – RM. The result implies that the Bank may be subject to additional translation (losses)/gains if the RMappreciates against other currencies and vice versa.

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200801006421 (807705-X)


5 Risk (Cont'd)


(iv) Profit Rate Risk

Non- EffectiveUp to >1 - 3 >3 - 12 1 - 5 Over 5 profit Trading profit

31 December 2019 1 month months months years years sensitive book Total rateRM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

ASSETSCash and short-term funds 4,637,701 - - - - 144,269 - 4,781,970 3.01

- impairment allowances - - - - - (6) - (6) -Deposits and placements with banks

and other financial institutions - 139,153 - - - - - 139,153 3.08Financial investments at FVOCI - - 1,700,589 1,019,386 - - - 2,719,975 3.49Financing and advances

- performing 3,879,643 7,809,694 256,266 585,246 384,066 - - 12,914,915 5.31- impaired - - - - - 385,303 - 385,303 -- impairment allowances - - - - - (257,265) - (257,265) -

Derivative financial assets - - - - - - 125,674 125,674 -Other assets - - - - - 33,317 - 33,317 -Total Financial Assets 8,517,344 7,948,847 1,956,855 1,604,632 384,066 305,618 125,674 20,843,036

LIABILITIESDeposits from customers 7,208,562 2,242,725 2,271,553 314,809 373 1,282,311 - 13,320,333 2.55Deposits and placements from banks

and other financial institutions 1,458,888 300,623 362,778 200,545 - 17,120 - 2,339,954 1.95Structured liabilities designated as FVTPL 18,429 123,786 441,044 682,341 29,758 - - 1,295,358 3.59Bills payable - - - - - 22,036 - 22,036 -Multi-Currency Sukuk Programme - 751,732 - 514,197 - - - 1,265,929 3.96Subordinated Commodity Murabahah

Financing - - - 317,957 271,655 - - 589,612 4.58Derivative financial liabilities - - - - - - 79,721 79,721 -Other liabilities

- provision for credit commitments - - - - - 2,552 - 2,552 -- others - - - - - 183,902 96 183,998 -

Total Financial Liabilities 8,685,879 3,418,866 3,075,375 2,029,849 301,786 1,507,921 79,817 19,099,493

Total profitsensitivity gap (168,535) 4,529,981 (1,118,520) (425,217) 82,280 (1,202,303) 45,857 1,743,543

Non-trading book

The Bank is exposed to various risks associated with the effects of fluctuations in the prevailing levels of market profit rates on its financial position and cash

flows. The following table summarises the Bank's exposure to the profit rates risk. The assets and liabilities at carrying amount are allocated to time bands by

reference to the earlier of the next contractual repricing dates and maturity dates.

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200801006421 (807705-X)


5 Risk (Cont'd)


(iv) Profit Rate Risk (Cont'd)

Non- EffectiveUp to >1 - 3 >3 - 12 1 - 5 Over 5 profit Trading profit

31 December 2018 1 month months months years years sensitive book Total rateRM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

ASSETSCash and short-term funds 2,705,038 - - - - 99,458 - 2,804,496 3.45

- impairment allowances - - - - - (2) - (2) -Financial investments at FVOCI - 199,314 741,131 1,785,238 - - - 2,725,683 3.50Financing and advances

- performing 5,145,794 7,755,853 186,969 578,739 348,203 - - 14,015,558 5.44- impaired - - - - - 356,312 - 356,312 -- impairment allowances - - - - - (234,533) - (234,533) -

Derivative financial assets - - - - - - 242,284 242,284 -Other assets - - - - - 29,666 3,431 33,097 -

Total Financial Assets 7,850,832 7,955,167 928,100 2,363,977 348,203 250,901 245,715 19,942,895

LIABILITIESDeposits from customers 5,737,514 2,251,387 2,409,787 339,898 30 705,961 - 11,444,577 2.66Deposits and placements from banks

and other financial institutions 963,798 275,195 630,865 1,405,666 - 24,440 - 3,299,964 2.24Structured liabilities designated as FVTPL - - 129,938 747,422 7,517 - - 884,877 3.78Bills payable - - - - - 18,594 - 18,594 -Multi-Currency Sukuk Programme - - 501,173 1,254,108 - - - 1,755,281 4.02Subordinated Commodity Murabahah

Financing - - - - 595,987 - - 595,987 4.32Derivative financial liabilities 56 - - - - - 227,274 227,330 -Other liabilities

- provision for credit commitments - - - - - 2,859 - 2,859 -- others - - - - - 208,460 - 208,460 -

Total Financial Liabilities 6,701,368 2,526,582 3,671,763 3,747,094 603,534 960,314 227,274 18,437,929

Total profitsensitivity gap 1,149,464 5,428,585 (2,743,663) (1,383,117) (255,331) (709,413) 18,441 1,504,966

Non-trading book

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5 Risk (Cont’d)


(v) Stress testing

Stress testing is an important procedure that is integrated into our market risk management framework to evaluatethe potential impact on portfolio values of more extreme, although plausible, events or movements in a set offinancial variables. In such scenarios, losses can be much greater than those predicted by VaR modelling.

Stress testing is implemented at the legal entity level with the scenarios tailored to capture the relevant potentialevents or market movements. The risk appetite around potential stress losses is set and monitored against referrallimits.

Market risk reverse stress tests are designed to identify vulnerabilities in our portfolios by looking for scenariosthat lead to loss levels considered severe for the relevant portfolio. These scenarios may be quite local oridiosyncratic in nature, and complement the systematic top-down stress testing.

Stress testing and reverse stress testing provide management with insights regarding the ‘tail risk’ beyond VaR,for which our appetite is limited

(vi) Back-testing

The accuracy of VaR models are routinely validated by backtesting them with both actual and hypothetical profitand loss against the corresponding VaR numbers. Hypothetical profit and loss excludes non-modelled items suchas fees, commissions and revenue of intra-day transactions.

The actual number of profits or losses in excess of VaR over this period can be used to gauge how well the modelsare performing. A VaR model is deemed satisfactory if it experiences less than five profit or loss exceptions in a250-day period.

e) Resilience risk

(i) Overview

Resilience risk is the risk that we are unable to provide critical services to customers, affiliates andcounterparties, as a result of sustained and significant operational disruption.

Resilience risk arises from failures or inadequacies in processes, people, systems or external events. Thesemay be driven by rapid technological innovation, changing behaviours of consumers, cyber-threats, cross-border dependencies and third-party relationships.

(ii) Resilience risk management


In May 2019, in line with the simplified risk taxonomy, HSBC Group, including the Bank formed a newResilience Risk sub-function to ensure operations continue functioning when an operational disturbanceoccurs. The resilience strategy is focused on the establishment of robust backup plans, detailed responsemethods, alternative delivery channels and recovery options. Resilience risk was formed to simplifyinteraction with stakeholders and to deliver clear, consistent and credible responses globally. Investment ininformation technology ('IT') Resilience is central to this commitment. Designing and implementing IT Systemsthat continue to be available to use, in the face of adverse conditions is a key objective. We seek to ensure weunderstand the root cause of IT failures and learn lessons both from our own experiences and those of others.

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5 Risk (Cont’d)

e) Resilience risk (Cont’d)

(ii) Resilience risk management (Cont’d)

Key developments in 2019 (Cont’d)

A number of initiatives to develop and embed the new sub-function:• HSBC Group recruited and consolidated personnel from several previously independent risk functions, in

Information and Cyber Security, Protective Security, Business Continuity and Incident Management,Third-party and Systems, Data Integrity and Transaction Processing.

• We adopted a new organisational structure that allows us to deliver our strengths and expertise moreefficiently.

• We developed a Target Operating Model to set out our desired state for the function. We identified areaswhere we need to develop the resilience risk vision.

• We used internal and external channels to recruit a leadership team that is aligned to our core values ofbeing open, dependable and connected.


Resilience Risk provides guidance and stewardship to our businesses and global functions about how we canprevent, adapt, and learn from resilience-related threats when something goes wrong. We view resiliencethrough six lenses: strategic change and emerging threats; third-party risk; information and data resilience;payments and processing resilience; systems and cyber resilience; and protective security risk. The GlobalResilience Risk Executive Committee oversees resilience risk and has accountability to the Global RiskManagement Board. The Global Resilience Risk Executive Committee is supported by its subcommittees thatprovide oversight over each of the respective Resilience Risk sub-teams within HSBC Group.


Operational resilience is our ability to adapt operations to continue functioning when an operationaldisturbance occurs. We measure resilience in terms of the maximum disruption period or their impact tolerancethat we are willing to accept for a business service. Resilience risk cannot be managed down to zero, so weconcentrate on critical business and strategic change programmes that have the highest potential to threatenour ability to provide continued service to our customers. Our resilience strategy is focused on theestablishment of robust back-up plans, detailed response methods, alternative delivery channels and recoveryoptions.

The Resilience Risk team oversees the identification, management and control of resilience risks.

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5 Risk (Cont’d)

f) Regulatory Compliance Risk

(i) Overview

Regulatory compliance risk is the risk of failure to observe the letter and spirit of all relevant laws, codes,rules, regulations and standards of good market practice, and incur fines and penalties and suffer damage toour business as a consequence.

Regulatory compliance risk arises from the risks associated with breaching the Bank’s duty to customers andother counterparties, inappropriate market conduct and breaching other regulatory requirements.

(ii) Regulatory compliance risk management


There were no material changes to the practices for the management of regulatory compliance risk in 2019,except for the initiatives that was undertook to raise our standards in relation to the conduct of business, asdescribed below under ‘Conduct of business’.


The Regulatory Compliance sub-function provides independent, objective oversight and challenge, andpromotes a compliance-orientated culture that supports the business in delivering fair outcomes for customers,maintaining the integrity of financial markets and achieving our strategic objectives.

Regulatory Compliance is part of the Compliance function, which is headed by the HSBC Group ChiefCompliance Officer. Regulatory Compliance is structured as a global function with regional and countryRegulatory Compliance teams, which support and advise each global business and global function.


Policies and procedures are regularly reviewed. Global policies and procedures require the promptidentification and escalation of any actual or potential regulatory breach to Regulatory Compliance.Reportable events are escalated to the RMM and the Risk Committee, as appropriate.

Conduct of business

In 2019, good conduct through people’s behaviour and decision making continued to be promoted andencouraged in order to deliver fair outcomes for customers, and to maintain financial market integrity. During2019:

• We continued to focus on the needs of vulnerable customers in our product and process design. In specificmarkets, we provided awareness and training initiatives, and we also deployed staff with specialistknowledge of conditions such as dementia. Financial inclusion initiatives progressed in specific markets,combatting financial abuse and developing financial education schemes for older customers.

• We further defined roles and responsibilities for our people as part of the enterprise risk managementframework across the Bank to consider the customer in decision making and action.

• We delivered our fifth annual global mandatory training course on conduct, and reinforced the importanceof conduct by highlighting examples of good conduct.

• We continued the expansion of recognition programmes across business areas for our people when theydeliver exceptional service, when working directly with customers or in supporting roles.

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5 Risk (Cont’d)

g) Financial crime and fraud risk

(i) Overview

Financial crime and fraud risk is the risk that we knowingly or unknowingly help parties to commit or to furtherpotentially illegal activity. Financial crime and fraud risk arises from day-to-day banking operations.

(ii) Financial crime and fraud risk management


During 2019, we continued to increase our efforts to strengthen our ability to combat financial crime. Weintegrated into our day-to-day operations the majority of the financial crime risk core capabilities deliveredthrough the Global Standards programme, which we set up in 2013 to enhance our risk management policies,processes and systems. The global programme infrastructure closed in 2019 and we have begun several initiativesto define the next phase of financial crime risk management.

• We continued to strengthen our anti-fraud capabilities, focusing on threats posed by new and existingtechnologies, and have delivered a comprehensive fraud training programme to our people.

• We continued to invest in the use of artificial intelligence (AI) and advanced analytics techniques to developa financial crime risk management framework for the future.

• We launched industry-leading anti-money laundering (AML) and sanctions automation systems to detect anddisrupt financial crime in international trade. These systems will strengthen our ability to fight financial crimethrough the identification of criminal activity and networks.


Since establishing a global framework of Financial Crime Risk Management Committees in the first quarter of2018, we have continued to strengthen and review the effectiveness of our governance framework to managefinancial crime risk. Formal governance committees is held and chaired by the chief executive officer. They helpto enable compliance with the letter and the spirit of all applicable financial crime compliance laws andregulations, as well as our own standards, values and policies relating to financial crime risks.


We continued to deliver an anti-bribery and corruption transformation programme to further enhance the policiesand controls around identifying and managing the risks of bribery and corruption across our business. Ourtransformation programme continued to focus on our anti-fraud and anti-tax evasion capabilities. Furtherenhancements have been made to our governance and policy frameworks, and to our management informationreporting on standardised financial crime controls.

We are investing in the next generation of capabilities to fight financial crime by applying advanced analytics andAI. We remain committed to enhancing our risk assessment capabilities and aim to deliver more proactive riskmanagement and improve the customer experience.

Working in partnership with the public sector and other financial institutions is vital to managing financial crimerisk. We are a strong proponent of public-private partnerships and participates in information-sharing initiativesaround the world to better understand these risks so that they can be mitigated more effectively.

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5 Risk (Cont’d)

f) Model risk

(i) Overview

Model risk is the potential for adverse consequences from business decisions informed by models, which can beexacerbated by errors in methodology, design or the way they are used. Model risk arises in both financial andnon-financial contexts whenever business decision making includes reliance on models.

(ii) Key developments in 2019

In September 2019, a number of initiatives were undertaken to further develop and embed the new ModelRisk Management sub-function, including:• Appointing Head of Model Risk Management.• Refining the model risk policy to enable a more risk-based approach to model risk management.• Conducting a full review of model governance arrangements overseeing model risk across the HSBC

Group, resulting in a range of enhancements to the underlying structure to improve effectiveness andincrease business engagement.

• Designing a new target operating model for Model Risk Management, referring to internal and industrybest practice.

(iii) Governance and structure

We have placed greater focus on our model risk activities during 2019. To reflect this, HSBC Group has createdthe role of Chief Model Risk Officer, which is undertaken by the Head of Model Risk Management. Model RiskManagement is structured as a sub-function within Regional Risk Strategy. Regional Model Risk Managementsupport and advise all areas of the HSBC Group, headed by the Regional Model Risk Steward.

As part of country’s model risk governance framework, the Chief Risk Officer assumes the role of the Model RiskSteward and together with regional Model Risk Management, provides oversight, challenge and ensurescompliance to HSBC’s model risk management policies.

(iv) Key risk management processes

Regular reviews are conducted for model risk management policies and procedures and the first line of defence isrequired to demonstrate a set of comprehensive and effective controls based on a library of model risk controlsprovided by Model Risk Management.

Model Risk Management report on model risk to senior management on a regular basis through use of the riskmap and regular key updates. The effectiveness of these processes is reviewed on a regular basis to ensure thatappropriate understanding and ownership of model risk is embedded in the businesses and functions.

6 Capital management

The Banks’s approach to capital management is driven by its strategic and organisational requirements, takinginto account the regulatory, economic and commercial environment in which the Bank operates.

It is the Bank’s objective to maintain a strong capital base to support the development of its business and to meetregulatory capital requirements at all times. The policy on capital management is underpinned by a capitalmanagement framework, which enables the Bank to manage its capital in a consistent manner.

The Bank’s capital management process is articulated in its annual capital plan which is approved by the Board.The plan is drawn up with the objective of maintaining both an appropriate amount of capital and an optimal mixbetween the different components of capital.

In accordance with Capital Management Framework, capital generated by subsidiaries in excess of plannedrequirements is returned to the parent companies, normally by way of dividends.

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6 Capital management (Cont’d)

The Bank is primarily the provider of capital to its subsidiaries and these investments are substantially funded bythe Bank’s own capital issuance and profit retention. As part of its capital management process, the Bank seeks tomaintain a prudent balance between the composition of its capital and that of its investment in subsidiaries.

The principal forms of capital are included in the following balances on the balance sheet: share capital, otherequity instruments, retained profits, other reserves and subordinated liabilities.

The Bank's regulatory capital is analysed in two tiers:

• Tier 1 capital is divided into Common Equity Tier 1 (CET1) Capital and Additional Tier 1 Capital. CET1Capital includes ordinary share capital, retained earnings and other regulatory adjustments relating to itemsthat are included in equity but are treated differently for capital adequacy purposes. The Bank does not haveany Additional Tier 1 Capital as at 31 December 2019.

• Tier 2 capital, which includes qualifying subordinated liabilities and subordinated term financing, impairmentallowances equal to 12-months and lifetime expected credit losses for non-credit impaired financing(commonly known as Stage 1 and 2 provisions), regulatory reserve, and the element of the fair value reserverelating to revaluation of property which are disclosed as regulatory adjustments.

a) Externally imposed capital requirements

The Bank is required to comply with BNM’s Capital Adequacy Framework for Islamic Banks (CapitalComponents) Guideline for the purpose of computing regulatory capital adequacy ratios. Under the said Guideline,the Bank is required to maintain the minimum capital adequacy ratios for Common Equity Tier 1 (CET1), Tier 1and Total Capital Ratios of 4.5%, 6.0% and 8.0% respectively.

b) Basel III

With effect from 1 January 2016, banking institutions in Malaysia are also required to maintain capital buffersabove the minimum capital adequacy ratios. The capital buffer requirements comprise Capital ConversationBuffer (CCB) of 2.5%, and the Countercyclical Capital Buffer (CCyB) ranging between 0% to 2.5%. CCB isintended to build up capital buffers by individual banking institutions during normal times that can be drawn downduring stress periods while CCyB is intended to protect the banking sector as a whole from the build-up of systemicrisk during an economic upswing when aggregate credit growth tends to be excessive.

In addition, the Bank is also required to set further buffers to reflect risks not included in the regulatory capitalcalculation, arising from internal assessment of risks and the results of stress tests.

c) Leverage Ratio

Basel III introduces a simple non risk-based leverage ratio as a complementary measure to the risk-based CapitalAdequacy Framework. It aims to constrain the build-up of excess leverage in the banking sector, introducingadditional safeguards against model risk and measurement errors. The ratio is a volume-based measure calculatedas Basel III Tier 1 Capital divided by Total on- and off-balance sheet exposures.

The Bank is required to comply with BNM Leverage Ratio Framework which came into effect on 1 January 2018.This includes the implementation of the leverage ratio framework in Malaysia with the minimum leverage ratiorequirement of 3%.

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7 Use of estimates and judgments

The results of the Bank is sensitive to the accounting policies, assumptions and estimates that underlie thepreparation of its consolidated financial statements. The significant accounting policies used in the preparation ofthe consolidated financial statements are described in Note 4.

The accounting policies that are deemed critical to the Bank’s results and financial positions, in terms of themateriality of the items to which the policy is applied, and which involve a high degree of judgment including theuse of assumptions and estimation, are discussed below.

a) Impairment of financing and advances

The Bank’s accounting policy for losses arising from the impairment of customer financing and advances isdescribed in Note 4(k). The calculation of the Bank’s ECL under MFRS 9 requires a number of judgements,assumptions and estimates to be made. The most significant are set out below:

Judgements:• Defining what is considered to be a significant increase in credit risk• Determining the lifetime and point of initial recognition of overdrafts and credit cards• Selecting and calibrating the PD, LGD and EAD models, which support the calculations, including making

reasonable and supportable judgements about how models react to current and future economic conditions• Selecting model inputs and economic forecasts, including determining whether sufficient and

appropriately weighted economic forecasts are incorporated to calculate unbiased expected loss

Estimates:• Note 5(b)(v) sets out the assumptions used in determining ECL and provide an indication of the sensitivity of

the result to the application of different weightings being applied to different economic assumptions

b) Fair value of financial instruments carried at fair value

The fair value of financial instruments is generally measured on the basis of the individual financial instrument.However, in cases where the Bank manages a group of financial assets and financial liabilities on the basis of itsnet exposure to either market risks or credit risk, the Bank measures the fair value of the group of financialinstruments on a net basis, but presents the underlying financial assets and liabilities separately in the financialstatements, unless they satisfy the offsetting criteria as described in Note 4(f)(iv).

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date. The following table sets out the financial instruments carriedat fair value.

Level 1 Level 2 Level 3 Total2019 RM'000 RM'000 RM'000 RM'000

Financial investments at FVOCI (Note 10) 2,719,975 - - 2,719,975Derivative financial assets (Note 14) 867 119,444 5,363 125,674

2,720,842 119,444 5,363 2,845,649

Structured liabilities designated at FVTPL(Note 22) - 1,082,565 212,793 1,295,358Derivative financial liabilities (Note 14) 1,374 78,239 108 79,721Multi-Currency Sukuk Programme (Note 24) - 1,265,929 - 1,265,929

1,374 2,426,733 212,901 2,641,0082018Financial investments at FVOCI (Note 10) 2,526,369 199,314 - 2,725,683Derivative financial assets (Note 14) 281 241,856 147 242,284

2,526,650 441,170 147 2,967,967

Structured liabilities designated at FVTPL(Note 22) - 866,063 18,814 884,877Derivative financial liabilities (Note 14) 1,538 225,792 - 227,330Multi-Currency Sukuk Programme (Note 24) - 1,755,281 - 1,755,281

1,538 2,847,136 18,814 2,867,488

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7 Use of estimates and judgments (Cont’d)

b) Fair value of financial instruments carried at fair value (Cont’d)

(i) Control framework

Fair values are subject to a control framework designed to ensure that they are either determined, or validated, bya function independent of the risk-taker.

Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models,independent price determination or validation is utilised. For inactive markets, the Bank sources alternative marketinformation, with greater weight given to information that is considered to be more relevant and reliable. Examplesof the factors considered are price observability, instrument comparability, consistency of data sources, underlyingdata accuracy and timing of prices.

For fair values determined using valuation models, the control framework includes development or validation byindependent support functions of the model logic, inputs, model outputs and adjustments. Valuation models aresubject to a process of due diligence before becoming operational and are calibrated against external market dataon an ongoing basis.

Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including portfolio changes, market movements and other fair value adjustments.

(ii) Determination of fair value

Fair values are determined according to the following hierarchy:

• Level 1 – Valuation technique using quoted market price

Financial instruments with quoted prices for identical instruments in active markets that the Bank can accessat the measurement date.

• Level 2 – Valuation technique using observable inputs

Financial instruments with quoted prices for identical or similar instruments in active markets or quoted pricesfor similar instruments in inactive markets and financial instruments valued using models where all significantinputs are observable.

• Level 3 – Valuation technique with significant unobservable inputs

Financial instruments valued using valuation techniques where one or more significant inputs areunobservable. The judgment as to whether a market is active may include, but is not restricted to, theconsideration of factors such as the magnitude and frequency of trading activity, the availability of prices andthe size of bid/offer spreads. The bid/offer spread represents the difference in prices at which a marketparticipant would be willing to buy compared with the price at which they would be willing to sell. In inactivemarkets, obtaining assurance that the transaction price provides evidence of fair value or determining theadjustments to transaction prices that are necessary to measure the fair value of the instrument requiresadditional work during the valuation process.

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(iii) Valuation techniques

Valuation techniques incorporate assumptions about factors that other market participants would use in theirvaluations. A range of valuation techniques is employed, dependent upon the instrument type and available marketdata. Most sophisticated valuation techniques are based upon discounted cash flow analysis, in which expectedfuture cash flows are calculated and discounted to present value using a discounting curve. Prior to considerationof credit risk, the expected future cash flows may be known, as would be the case for the fixed leg of an profit rateswap, or may be uncertain and require projection, as would be the case for the floating leg of an profit rate swap.Projection utilises market forward curves, if available. In option models, the probability of different potentialfuture outcomes must be considered. In addition, the values of some products are dependent upon more than onemarket factor, and in these cases it will typically be necessary to consider how movements in one market factormay impact the other market factors. The model inputs necessary to perform such calculations include profit rateyield curves, exchange rates, volatilities, correlations, prepayment and default rates.

The majority of valuation techniques employ only observable market data. However, certain financial instrumentsare valued on the basis of valuation techniques that feature one or more significant market inputs that areunobservable, and for them the measurement of fair value is more judgmental. An instrument in its entirety isclassified as valued using significant unobservable inputs, if in the opinion of management, a significantproportion of the instrument’s inception profit (day 1 gain or loss) or greater than 5% of the instrument’s carryingvalue is driven by unobservable inputs. ‘Unobservable’ in this context means that there is little or no currentmarket data available from which to determine the price at which an arm’s length transaction would be likely tooccur. It generally does not mean that there is no market data available at all upon which to base a determinationof fair value (consensus pricing data may, for example, be used). All fair value adjustments are included withinthe levelling determination.

Structured notes issued and certain other hybrid instrument liabilities are included within structured liabilities andare measured at fair value. The credit spread applied to these instruments is derived from the spreads at which theBank issues structured notes.

Gains and losses arising from changes in the credit spread of liabilities issued by the Bank reverse over thecontractual life of the debt, provided that the debt is not paid at a premium or a discount.

Changes in fair value are generally subject to a profit and loss analysis process. This process disaggregates changesin fair value into three high level categories; (i) portfolio changes, such as new transactions or maturingtransactions, (ii) market movements, such as changes in foreign exchange rates or equity prices, and (iii) other,such as changes in fair value adjustments, discussed below.

(iv) Fair value adjustments

Fair value adjustments are adopted when the Bank determines there are additional factors considered by marketparticipant that are not incorporated within the valuation model. Movements in the level of fair value adjustmentsdo not necessarily result in the recognition of profits or losses within the income statement, such as when modelsare enhanced and therefore fair value adjustments may no longer be required.

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(iv) Fair value adjustments (Cont’d)

Bid-offer

MFRS 13 requires use of the price within the bid-offer spread that is most representative of fair value. Valuationmodels will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offercost would be incurred if substantially all residual net portfolio market risks were closed using available hedginginstruments or by disposing of, or unwinding the position.

Uncertainty

Certain model inputs may be less readily determinable from market data, and/or the choice of model itself maybe more subjective. In these circumstances, an adjustment may be necessary to reflect the likelihood that marketparticipants would adopt more conservative values for uncertain parameters and/or model assumptions, than thoseused in the Bank’s valuation model.

Credit valuation adjustment (CVA) and Debit valuation adjustment (DVA)

The CVA is an adjustment to the valuation of over-the-counter (OTC) derivative contracts to reflect the possibilitythat the counterparty may default and the Bank may not receive the full market value of the transactions.

The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that the Bankmay default, and that the Bank may not pay the full market value of the transactions.

The Bank calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entityhas exposure. With the exception of central clearing parties, all third-party counterparties are included in the CVAand DVA calculations, and these adjustments are not netted across entities. The Bank reviews and refines theCVA and DVA methodologies on an ongoing basis.

The Bank calculates the CVA by applying the probability of default (PD) of the counterparty, conditional on thenon-default of the Bank, to the Bank’s expected positive exposure to the counterparty and multiplying the resultby the loss expected in the event of default. Conversely, the Bank calculates the DVA by applying the PD of theBank, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty tothe Bank and multiplying the result by the loss expected in the event of default. Both calculations are performedover the life of the potential exposure.

For most products the Bank uses a simulation methodology, which incorporates a range of potential exposuresover the life of the portfolio, to calculate the expected positive exposure to a counterparty. The simulationmethodology includes credit mitigants, such as counterparty netting agreements and collateral agreements withthe counterparty.

The methodologies do not, in general, account for ‘wrong-way risk’ which arises when the underlying value ofthe derivative prior to any CVA is positively correlated to the PD of the counterparty. When there is significantwrong-way risk, a trade-specific approach is applied to reflect this risk in the valuation.

Funding fair value adjustment (FFVA)

The FFVA is calculated by applying future market funding spreads to the expected future funding exposure ofany uncollateralised component of the OTC derivative portfolio. The expected future funding exposure iscalculated by a simulation methodology, where available and is adjusted for events that may terminate theexposure, such as the default of the Bank or the counterparty. The FFVA and DVA are calculated independently.

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(iv) Fair value adjustments (Cont’d)

Model limitation

Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do notcapture all material market characteristics. In these circumstances, model limitation adjustments are adopted.

Inception profit (Day 1 profit or loss reserves)

Inception profit adjustments are adopted where the fair value estimated by a valuation model is based on one ormore significant unobservable inputs.

(v) Reconciliation of fair value measurements in Level 3 of the fair value hierarchy

The following table provides a reconciliation of the movement between opening and closing balances of Level 3financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:

2019 2018Derivativefinancial

assets

Derivativefinancialliabilities

Structuredliabilities

Derivativefinancial

assets



RM'000Balance at 1 January 147 - 18,814 - - -Total gains or losses

-in profit or loss 5,216 108 (236) 147 - (774)-in OCI - - (82)

Issues - - 194,597 - - 19,588Settlements - - (300) - - -Transfer out of Level 3 - - - - - -Balance at 31 December 5,363 108 212,793 147 - 18,814

Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period.

For derivative financial assets/liabilities, transfers out of Level 3 were due to the maturity of the derivatives or as aresult of early termination.

For structured liabilities, transfers into Level 3 were due to new deals with unobservable volatilities. Transfersout of Level 3 resulted from maturity or early termination of the instruments.

For structured liabilities, realised and unrealised gains and losses are presented in profit or loss under “Otheroperating income”.

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(v) Reconciliation of fair value measurements in Level 3 of the fair value hierarchy (Cont’d)

Total gains or losses included in profit or loss for the financial year in the above tables are presented in thestatement of profit or loss as follows:

2019RM'000

Derivativefinancial

assets



Total gains or losses included in profit or loss for the financialyear ended:

-Net trading income - - -

Total gains or losses for the year ended included in profit or loss

for assets and liabilities held at the end of the financial year

-Net trading income 5,216[2] 108[1] (236)[2]

2018RM'000Total gains or losses included in profit or loss for the financial

year ended:-Net trading income - - -

Total gains or losses for the year ended included in profit

or loss for assets and liabilities held at the end of the financial year

-Net trading income 147[2] - 774[2]

[1] Denotes losses in the Profit or Loss[2] Denotes gains in the Profit or Loss

(vi) Quantitative information about significant unobservable inputs in Level 3 valuations

Level 3 fair values are estimated using unobservable inputs for the financial assets and liabilities. The followingtable shows the valuation techniques used in the determination of fair values within Level 3 at Bank basis for thecurrent year, as well as the key unobservable inputs used in the valuation models.

Type of financial instrumentValuationtechnique Key unobservable inputs

Range of estimates forunobservable input

Structured liabilities Option model Long term equity volatility 2019: 6.03%-10.82%2018: 13.37%

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(vii) Key unobservable inputs to Level 3 financial instruments

Volatility

Volatility is a measure of the anticipated future variability of a market price. Volatility tends to increase in stressedmarket conditions, and decrease in calmer market conditions. Volatility is an important input in the pricing ofoptions. In general, the higher the volatility, the more expensive the option will be. This reflects both the higherprobability of an increased return from the option, and the potentially higher costs that the Bank may incur inhedging the risks associated with the option. If option prices become more expensive, this will increase the valueof the Bank’s long option positions (i.e. the positions in which the Bank has purchased options), while the Bank’sshort option positions (i.e. the positions in which the Bank has sold options) will suffer losses.

Volatility varies by underlying reference market price, and by strike and maturity of the option. Volatility alsovaries over time. Certain volatilities, typically those of a longer-dated nature, are unobservable. The unobservablevolatility is then estimated from observable data. For example, longer-dated volatilities may be extrapolated fromshorter-dated volatilities.

The range of unobservable volatilities quoted in the table reflects the wide variation in volatility inputs byreference to market price. For example, foreign exchange volatilities for a pegged currency may be very low,whereas for non-managed currencies the foreign exchange volatility may be higher. As a further example,volatilities for deep-in-the money or deep-out-of-the-money equity options may be significantly higher than at-the-money options. For any single unobservable volatility, the uncertainty in the volatility determination issignificantly less than the range quoted above.

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c) Fair values of financial assets and liabilities not measured at fair value

31 Dec 2019 31 Dec 2019 31 Dec 2018 31 Dec 2018Carrying Fair Carrying Fair

amount value amount valueRM'000 RM'000 RM'000 RM'000

Financial AssetsFinancing and advances 13,042,953 13,059,556 14,137,337 14,131,279

Financial LiabilitiesDeposits from customers 13,320,333 13,318,332 11,444,577 11,395,286Deposits and placements from banks

and other financial institutions 2,339,954 2,339,739 3,299,964 3,349,428Subordinated Commodity Murabahah

Financing 589,612 620,133 595,987 614,451

Cash and short-term fundsDeposits and placements with banks and other financial institutions

The carrying amounts approximate fair values due to their relatively short-term nature.

Financing and advances

Deposits from customersDeposits and placements from banks and other financial institutions

Multi-Currency Sukuk ProgrammeSubordinated Commodity Murabahah Financing

The fair value of subordinated bonds issued at cost were estimated based on discounted cash flows using rates currently

offered for debt instruments of similar remaining maturities and credit grading.

Deposits, placements and obligations which mature or reprice after six months are grouped by residual maturity. Fair value is

estimated using discounted cash flows, applying either market rates, where applicable, or current rates offered for deposits of

similar remaining maturities. The fair value of a deposit repayable on demand is approximated by its carrying value.

To determine the fair value of financing and advances to banks and customers, financing and advances are segregated, as far

as possible, into portfolios of similar characteristics. Fair values are based on observable market transactions, when

available. When they are unavailable, fair values are estimated using valuation models incorporating a range of input

assumptions. These assumptions may include: value estimates from third-party brokers reflecting over-the-counter trading

activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using

assumptions that the Bank believes are consistent with those that would be used by market participants in valuing such

financing; new business rates estimates for similar financing; and trading inputs from other market participants including

observed primary and secondary trades. From time to time, the Bank may engage a third-party valuation specialist to

measure the fair value of a pool of financing.

The fair value of financing and advances reflect expected credit losses at the balance sheet date and estimates of market

participants’ expectations of credit losses over the life of the financing and advances, and the fair value effect of repricing

between origination and the balance sheet date. For credit impaired financing and advances, fair value is estimated by

discounting the future cash flows over the time period they are expected to be recovered.

The fair value of each financial asset and liabilities presented in the statement of financial position of the Bank approximates

the carrying amount as at the reporting date except for the following:

The methods and assumptions used in estimating the fair values of financial instruments other than those already mentionedin Note 4(f)(v) are as follows:

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c) Fair values of financial assets and liabilities not measured at fair value (Cont'd)

Level 1 Level 2 Level 3Total fair

value

Totalcarryingamount

31 Dec 2019 RM'000 RM'000 RM'000 RM'000 RM'000Financial AssetsFinancing and advances - - 13,059,556 13,059,556 13,042,953

Financial LiabilitiesDeposits from customers - 13,318,332 - 13,318,332 13,320,333Deposits and placements from banks

and other financial institutions - 2,339,739 - 2,339,739 2,339,954Subordinated Commodity Murabahah

Financing - 620,133 - 620,133 589,612

31 Dec 2018Financial AssetsFinancing and advances - - 14,131,279 14,131,279 14,137,337

Financial LiabilitiesDeposits from customers - 11,395,286 - 11,395,286 11,444,577Deposits and placements from banks

and other financial institutions - 3,349,428 - 3,349,428 3,299,964Subordinated Commodity Murabahah

Financing - 614,451 - 614,451 595,987

The fair value of each financial asset and liabilities presented in the statement of financial position of the Bank approximates

the carrying amount as at the reporting date except for the following (Cont'd):

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8 Cash and Short-Term Funds

31 Dec 2019 31 Dec 2018RM'000 RM'000

Cash and balances with banks and other financial institutions 215,943 165,396Money at call and interbank placements

maturing within one month 4,566,021 2,639,098

4,781,964 2,804,494

9 Deposits and Placements with Banks and Other Financial Institutions

31 Dec 2019 31 Dec 2018RM'000 RM'000

Central bank 139,153 -

10 Financial Investments at Fair Value through Other Comprehensive Income (FVOCI)

31 Dec 2019 31 Dec 2018RM'000 RM'000

Money market instruments:Malaysian Government Islamic Sukuk 2,719,975 2,526,369Islamic Treasury Bill - 199,314

2,719,975 2,725,683

Maturing within one year 1,700,589 940,445More than one year to three years 1,019,386 1,554,002More than three years to five years - 231,236

2,719,975 2,725,683

The maturity structure of money market instruments held as FVOCI is as follows:

Money at call and interbank placements maturing within one month is within Stage 1 allocation (12-months ECL) withRM6,000 impairment allowance as at 31 December 2019 (31 December 2018: RM2,000).

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11 Financing and Advances(i) By type and Shariah contracts

Lease-based Equity-basedAt amortised cost contracts contracts

Commodity Bai Ijarah Thumma Diminishing Ujrah TotalMurabahah Al-Inah Al-Bai Musharakah

31 Dec 2019 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

Cash line-i 73,131 - - - - 73,131Term financing:

House financing - - - 4,164,372 - 4,164,372Hire purchase receivables - - 194,049 - - 194,049Syndicated term financing 728,298 - - - - 728,298Other term financing 2,867,908 39 - 971,127 - 3,839,074

Trust receipts 525,826 - - - - 525,826Claims on customers under

acceptance credits 323,272 - - - - 323,272Bills receivables 470,920 - - - - 470,920Staff financing-i 1,041 30 - 1,173 - 2,244Credit cards-i - - - - 1,258,564 1,258,564Revolving financing 1,716,165 - - - - 1,716,165Other financing - - - 4,303 - 4,303

Gross financing and advances 6,706,561 69 194,049 5,140,975 1,258,564 13,300,218

Less: Impairment allowance (257,265)

Total net financing and advances 13,042,953

Sale-based contracts

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11 Financing and Advances (Cont'd)(i) By type and Shariah contracts (Cont'd)

Equity-basedcontracts

Commodity Bai Ijarah Ijarah Thumma Diminishing Ujrah TotalMurabahah Al-Inah Al-Bai Musharakah

31 Dec 2018 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

Cash line-i 75,334 - - - - - 75,334Term financing:

House financing - - - - 4,329,220 - 4,329,220Hire purchase receivables - - - 195,636 - - 195,636Lease receivables - - 539 - - - 539Syndicated term financing 1,334,656 - - - - - 1,334,656Other term financing 3,307,216 62 - - 1,010,142 - 4,317,420

Trust receipts 523,625 - - - - - 523,625Claims on customers under

acceptance credits 422,293 - - - - - 422,293Bills receivables 456,578 - - - - - 456,578Staff financing-i 1,520 52 - - 1,572 - 3,144Credit cards-i - - - - - 1,075,634 1,075,634Revolving financing 1,634,365 - - - - - 1,634,365Other financing - - - - 3,426 - 3,426

Gross financing and advances 7,755,587 114 539 195,636 5,344,360 1,075,634 14,371,870

Less: Impairment allowance (234,533)

Total net financing and advances 14,137,337

Lease-based contractsSale-based contracts

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11 Financing and Advances (Cont'd)

(ii) By type of customer31 Dec 2019 31 Dec 2018

RM'000 RM'000(Restated)

Domestic non-bank financial institutions 494,886 619,421Domestic business enterprises:

Small medium enterprises 937,397 1,983,223Others 4,221,026 3,781,656

Government and statutory bodies 1,917 4,527Individuals 6,263,102 6,142,634Other domestic entities 1,137 1,258Foreign entities/individuals 1,380,753 1,839,151

13,300,218 14,371,870

(iii) By profit rate sensitivity31 Dec 2019 31 Dec 2018


Fixed rate:Hire purchase receivables 194,049 195,636Other financing 3,443,551 3,300,541

Variable rate:Base Rate/Base Financing Rate plus 5,197,432 5,392,670Cost-plus 4,465,186 5,483,023

13,300,218 14,371,870

(iv) By residual contractual maturity31 Dec 2019 31 Dec 2018


Maturing within one year 4,541,871 5,895,827More than one year to three years 1,755,409 1,166,130More than three years to five years 1,012,833 1,289,364Over five years 5,990,105 6,020,549

13,300,218 14,371,870

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(v) By sector31 Dec 2019 31 Dec 2018


Agriculture, hunting, forestry & fishing 16,715 18,986Mining and quarrying 184,190 231,674Manufacturing 1,203,233 1,495,092Electricity, gas and water 199,311 128,262Construction 1,051,079 783,688Real estate 759,769 1,135,507Wholesale & retail trade, restaurants & hotels 824,314 995,569Transport, storage and communication 177,572 214,291Finance, takaful and business services 868,309 1,040,672Household - Retail 6,785,186 6,706,145Others 1,230,540 1,621,984

13,300,218 14,371,870

(vi) By purpose31 Dec 2019 31 Dec 2018


Purchase of landed property:Residential 4,165,546 4,330,789Non-residential 799,749 835,867

Purchase of transport vehicles 771 1,255Consumption credit 2,382,777 2,127,277Construction 817,249 567,385Working capital 4,273,540 5,229,130Other purpose 860,586 1,280,167

13,300,218 14,371,870

(vii) By geographical distribution31 Dec 2019 31 Dec 2018


Northern Region 1,557,283 1,497,309Southern Region 1,570,904 1,464,169Central Region 9,793,026 11,010,829Eastern Region 379,005 399,563

13,300,218 14,371,870

Concentration by location for financing and advances is based on the location of the customer.

The Southern region consists of the states of Johor, Malacca and Negeri Sembilan.The Northern region consists of the states of Perlis, Kedah, Penang, Perak, Pahang, Kelantan and Terengganu.

The Central region consists of the states of Selangor, Federal Territory of Kuala Lumpur and Federal Territory of Putrajaya.

The Eastern region consists of the states of Sabah, Sarawak and the Federal Territory of Labuan.

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(viii) Assets under Management

31 Dec 2019 31 Dec 2018RM'000 RM'000

Financial assets at fair value through profit or loss [1]600,054 -

Total gross financing and advances 3,071,768 3,381,964Less: Impairment allowance (347) (896)

Total net financing and advances 3,071,421 3,381,068

Maturity not exceeding one year 35,000 794,750Maturity exceeding one year 437,750 -

Total commitments and contingencies 472,750 794,750

Risk weighted assets (RWA) 3,298,355 2,939,702

[1] These are held for the purpose selling in the near term.

12 Impaired Financing

(i) Gross carrying amount movement of financing and advances classified as credit impaired:

31 Dec 2019 31 Dec 2018RM'000 RM'000

(Restated)

Gross carrying amount as at 1 January 356,312 282,049Transfer within stages 59,449 71,690Net remeasurement due to changes in credit risk 70,641 115,711Written-off (101,099) (113,156)Others - 18

Gross carrying amount as at 31 December 385,303 356,312

The SIAF/IAA arrangement is based on the Wakalah principle where HBMY, solely or together with other financialinstitutions provide the funds, whilst the assets are managed by the Bank (as the Wakeel or agent). However, in thearrangement, the profits of the underlying assets are recognised by HBMY and the other financial institutions proportionatelyin relation to the funding provided in the syndication arrangement. At the same time, risks on the financing are alsoproportionately borne by HBMY and the other financial institutions. Hence, the underlying assets and allowance forimpairment arising thereon, if any, are proportionately recognised and accounted for by HBMY and the other financialinstitutions.

The recognition and derecognition treatments of the above are in accordance to Note 4(g).

The details of assets under management in respect of the Syndicated Investment Account Financing (SIAF)/Investment AgencyAccount (IAA) financing are as below. The exposures and the corresponding risk weighted amount are reported in investors'financial statements.

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12 Impaired Financing (Cont'd)

(ii) By contract31 Dec 2019 31 Dec 2018


Ijarah Thumma Al-Bai (AITAB) (hire purchase) 1,117 6,368Commodity Murabahah (cost-plus) 248,763 201,946Diminishing Musharakah (profit and loss sharing) 128,582 140,036Bai Al-Inah (sell and buy back) 32 32Ujrah (fee-based) 6,809 7,930

385,303 356,312

(iii) By sector31 Dec 2019 31 Dec 2018


Mining and quarrying - 704Manufacturing 16,247 17,354Construction 4,199 3,142Real estate 35 -Wholesale & retail trade, restaurants & hotels 18,004 11,139Transport, storage and communication 369 4,153Finance, takaful and business services 28,721 28,661Household - Retail 292,565 265,333Others 25,163 25,826

385,303 356,312

(iv) By purpose31 Dec 2019 31 Dec 2018


Purchase of landed property:Residential 105,991 124,989Non-residential 18,307 11,824

Purchase of transport vehicles 32 146Consumption credit 185,059 138,227Construction 2,724 2,402Working capital 50,381 53,902Others 22,809 24,822

385,303 356,312

(v) By geographical distribution31 Dec 2019 31 Dec 2018


Northern Region 33,178 37,748Southern Region 39,561 39,453Central Region 305,637 273,061Eastern Region 6,927 6,050

385,303 356,312

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13 Expected credit losses allowance charges (ECL)

(i) Movements in ECL allowances for financing and advances

Stage 1 Stage 2 Stage 3Lifetime

12- Lifetime ECL creditmonth ECL ECL Lifetime impaired

not credit not credit ECL credit Specific Collectiveimpaired impaired impaired provision provision TotalRM'000 RM'000 RM'000 RM'000 RM'000 RM'000

Balance at 1 January 2019 43,988 64,464 126,081 - - 234,533Changes due to financial assets recognised in

the opening balance that have:- Transferred to Stage 1 21,747 (18,175) (3,572) - - -- Transferred to Stage 2 (4,295) 8,351 (4,056) - - -- Transferred to Stage 3 (443) (3,831) 4,274 - - -

New financial assets originated or purchased 17,655 - - - - 17,655Net remeasurement due to changes in credit risk (31,931) 17,194 121,131 - - 106,394Asset written-off - - (101,099) - - (101,099)Others (218) - - - - (218)Balance at 31 December 2019 46,503 68,003 142,759 - - 257,265

Balance at 1 January 2018 - - - 74,265 240,908 315,173

- adoption of MFRS 9[1]

61,134 65,520 110,136 (74,265) (240,908) (78,383)

Balance restated[1]

61,134 65,520 110,136 - - 236,790Changes due to financial assets recognised in

the opening balance that have:- Transferred to Stage 1 14,039 (12,550) (1,489) - - -- Transferred to Stage 2 (4,667) 10,011 (5,344) - - -- Transferred to Stage 3 (638) (3,821) 4,459 - - -

Changes due to modification not derecognised - - - - - -New financial assets originated or purchased 19,140 - - - - 19,140Net remeasurement due to changes in credit risk (44,424) 5,304 131,234 - - 92,114Asset written-off - - (113,156) - - (113,156)

Others[1]

(596) - 241 - - (355)Balance at 31 December 2018 43,988 64,464 126,081 - - 234,533

-

-

-

[1]Balances have been restated as disclosed in Note 43

The following table shows reconciliation from the opening to the closing balance of the ECL allowance for financing and

advances:

12-months ECL not credit impaired (Stage 1) - increased by RM2.5 million, primarily due to increase in new financial assets

originated or purchased, migration of financings from Stage 2 and Stage 3 and partially offset by remeasurement driven by

changes in credit risk.

The Bank measures the expected credit losses (ECL) using the three-stage approach. The following section explains how

significant changes in the gross carrying amount of financing and advances during the year have contributed to the changes in the

ECL allowances for the Bank under the expected credit loss model.

The total ECL allowances increased by RM 22.7 million compared to the balance at the beginning of the year. This net increase

was mainly contributed by net remeasurement due to changes in credit risk (RM 106.4 million) and new financial assets originated

or purchased (RM 17.7 million), partly offset by asset written-off (RM 101.1 million).

Lifetime ECL not credit-impaired (Stage 2) - increased by RM3.5 million, primarily due to increase in remeasurement driven

by changes in credit risk and partially offset by migration of financings to Stage 1 and Stage 3.

Lifetime ECL credit-impaired (Stage 3) - increased by RM16.7 million, primarily due to increase in remeasurement driven by

changes in credit risk, and partially offset by asset written-off and migration of financings to Stage 1 and Stage 2.

[1]

[1]

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13 Expected credit losses allowance charges (ECL) (Cont'd)

(ii) Movements in ECL allowances for financing commitments

Stage 1 Stage 2 Stage 312- Lifetime

month ECL ECL Lifetimenot credit not credit ECL creditimpaired impaired impaired TotalRM'000 RM'000 RM'000 RM'000

Balance at 1 January 2019 1,109 925 825 2,859Changes due to financial assets recognised in

the opening balance that have:- Transferred to Stage 1 81 (81) - -- Transferred to Stage 2 (88) 88 - -- Transferred to Stage 3 - - - -

New financial assets originated or purchased 653 - - 653Net remeasurement due to changes in credit risk (471) (58) (423) (952)Others (8) - - (8)Balance at 31 December 2019 1,276 874 402 2,552

Balance at 1 January 2018 - - - -- adoption of MFRS 9 946 1,880 997 3,823

Balance restated 946 1,880 997 3,823Changes due to financial assets recognised in

the opening balance that have:- Transferred to Stage 1 152 (152) - -- Transferred to Stage 2 (56) 56 - -- Transferred to Stage 3 (1) (2) 3 -

New financial assets originated or purchased 240 - - 240Net remeasurement due to changes in credit risk (99) (857) (175) (1,131)Others (73) - - (73)Balance at 31 December 2018 1,109 925 825 2,859

Allowance for drawn amount and provisions for the undrawn commitments are not able to be split for retail portfolio, and in

accordance to MFRS 7 Financial Instruments disclosure, the provisions for the financing and other credit related commitments for

retail portfolio are presented together with the allowance for the drawn financing and advances.

The following table shows reconciliation from the opening to the closing balance of the ECL allowance for financing

commitments:

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14 Derivative Financial Instruments

Details of derivative financial instruments outstanding are as follows:

Derivative financial instruments measured at their fair values together with their corresponding contract/notional amounts:

Up to 1 Year >1 - 5 Years > 5 Years Total Up to 1 Year >1 - 5 Years > 5 Years Total Up to 1 Year >1 - 5 Years > 5 Years Total31 Dec 2019 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

Trading derivatives:Foreign exchange contracts- Forwards 6,829,354 - - 6,829,354 35,968 - - 35,968 36,232 - - 36,232- Swaps 642,318 - - 642,318 41,737 - - 41,737 41,568 - - 41,568Profit rate related contracts- Swaps 1,048,000 863,428 - 1,911,428 1,097 11,565 - 12,662 - 1,601 - 1,601- Options 170,519 245,982 - 416,501 2,620 1,960 - 4,580 - - - -Equity related contracts- Options purchased 466,444 396,199 - 862,643 16,084 14,643 - 30,727 196 124 - 320

Sub- total 9,156,635 1,505,609 - 10,662,244 97,506 28,168 - 125,674 77,996 1,725 - 79,721

Total 9,156,635 1,505,609 - 10,662,244 97,506 28,168 - 125,674 77,996 1,725 - 79,721

The Bank does not have any hedging instrument as at 31 December 2019.

Contract / Notional Amount Positive Fair Value Negative Fair Value

115


200801006421 (807705-X)

NOTES TO THE FINANCIAL STATEMENTS (Cont'd)14 Derivative Financial Instruments (Cont'd)

Up to 1 Year >1 - 5 Years > 5 Years Total Up to 1 Year >1 - 5 Years > 5 Years Total Up to 1 Year >1 - 5 Years > 5 Years Total31 Dec 2018 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

Trading derivatives:Foreign exchange contracts- Forwards 6,141,764 - - 6,141,764 43,589 - - 43,589 44,382 - - 44,382- Swaps 1,695,255 646,019 - 2,341,274 134,476 42,693 - 177,169 135,262 42,095 - 177,357Profit rate related contracts- Swaps 1,997,822 1,250,000 232,745 3,480,567 3,387 1,846 281 5,514 2,848 - - 2,848- Options - 421,166 - 421,166 - 3,441 - 3,441 - 942 - 942Equity related contracts- Options purchased 116,883 362,229 - 479,112 2,033 10,538 - 12,571 - 1,745 - 1,745

Sub- total 9,951,724 2,679,414 232,745 12,863,883 183,485 58,518 281 242,284 182,492 44,782 - 227,274

Hedging Derivatives:Fair Value HedgeProfit rate related contracts- Swaps 80,000 - - 80,000 - - - - 56 - - 56Sub- total 80,000 - - 80,000 - - - - 56 - - 56

Total 10,031,724 2,679,414 232,745 12,943,883 183,485 58,518 281 242,284 182,548 44,782 - 227,330

Included in the net non-profit income is the net gain/(loss) arising from fair value hedges during the financial year as follows:31 Dec 2019 31 Dec 2018

RM'000 RM'000

Gain on hedging instruments 13 348Loss on the hedged items attributable to the hedged risk (29) (366)

Net loss from fair value hedges (16) (18)

Contract / Notional Amount Positive Fair Value Negative Fair Value

116


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15 Other Assets

31 Dec 2019 31 Dec 2018RM'000 RM'000

(Restated)Settlements - 3,431Income receivable 6,234 7,733Profit receivable 24,990 21,383Prepayments - 190Amount due from holding company 2,093 360

ROU assets [1]24,504 -

Other receivables 10,820 17,56768,641 50,664

[1] ROU assets comprise solely of properties. There are no additions during the financial year.

Lease related expenses and cash outflows during the financial year:

31 Dec 2019 31 Dec 2018RM'000 RM'000

Finance expense 1,417 -Expense related to short-term leases

(Included in establishment related expenses) 222 -Cash outflow for leases payments 7,357 -

16 Statutory Deposits with Bank Negara Malaysia

The non-profit bearing statutory deposits are maintained with Bank Negara Malaysia in compliance with Section 26(2)c and26(3) of the Central Bank of Malaysia Act 2009, the amounts of which are determined at set percentages of total eligibleliabilities.

117


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17 Equipment

Officeequipment,

fixtures and Computer Motor Work2019 fittings equipment vehicles in Progress Total

RM'000 RM'000 RM'000 RM'000 RM'000Cost

Balance at 1 January 36,132 19,706 299 1,506 57,643Additions 1,330 597 301 - 2,228Disposals - - (299) - (299)Written off (1,071) (85) - - (1,156)Reclassification 1,506 - - (1,506) -Balance at 31 December 37,897 20,218 301 - 58,416

Accumulated depreciation

Balance at 1 January 33,023 17,512 240 - 50,775Charge for the financial year 1,160 718 84 - 1,962Written off (1,068) (85) - - (1,153)Disposals - - (269) - (269)Balance at 31 December 33,115 18,145 55 - 51,315

Net book value at 31 December 4,782 2,073 246 - 7,101

2018

Cost

Balance at 1 January 37,419 18,402 299 - 56,120Additions 761 1,406 - 1,506 3,673Written off (2,048) (102) - - (2,150)Balance at 31 December 36,132 19,706 299 1,506 57,643

Accumulated depreciation

Balance at 1 January 34,043 16,377 180 - 50,600Charge for the financial year 1,028 1,236 60 - 2,324Written off (2,048) (101) - - (2,149)Balance at 31 December 33,023 17,512 240 - 50,775

Net book value at 31 December 3,109 2,194 59 1,506 6,868

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18 Intangible assets

31 Dec 2019 31 Dec 2018RM'000 RM'000

Computer software

Cost

Balance at 1 January 5,053 5,053Written off (1) -Balance at 31 December 5,052 5,053

Accumulated amortisation

Balance at 1 January 5,053 5,053Written off (1) -Balance at 31 December 5,052 5,053

Net book value at 31 December - -

19 Deferred Tax Assets

The amounts, prior to offsetting are summarised as follows:31 Dec 2019 31 Dec 2018

RM'000 RM'000

Deferred tax assets 26,164 17,676Deferred tax liabilities (2,256) (313)

23,908 17,363

31 Dec 2019 31 Dec 2018RM'000 RM'000

Deferred tax assets- settled more than 12 months 8,588 6,153- settled within 12 months 17,576 11,523Deferred tax liabilities- settled more than 12 months (929) (103)- settled within 12 months (1,327) (210)

23,908 17,363

The recognised deferred tax assets and liabilities (before offsetting) are as follows:31 Dec 2019 31 Dec 2018

RM'000 RM'000

Equipment capital allowances (322) (210)FVOCI reserve (1,934) (103)Own credit reserve 2,607 943Provision for accrued expenses 7,175 7,938Deferred income 9,302 2,838Lease receivables 215 218Financing and advances 6,865 5,739

23,908 17,363

Deferred tax assets and liabilities are offset where there is a legally enforceable right to set-off current tax assets against

current tax liabilities.

119


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19 Deferred Tax Assets (Cont'd)

The movements in temporary differences during the financial year are as follows:

RecognisedRecognised in other

Balance at Adoption of Balance at in profit comprehensive Balance at1 January MFRS9 1 January or loss income 31 December

2019 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

Financing and advances ## - 5,739 1,126 - 6,865Own Credit reserve ## - 943 - 1,664 2,607Provision for accrued expenses ## - 7,938 (763) - 7,175Deferred income ## - 2,838 6,464 - 9,302Lease receivables ## - 218 (3) - 215

Deferred Tax Assets ## - 17,676 6,824 1,664 26,164

Equipment capital allowances ## - (210) (112) - (322)Financial investment at FVOCI ## - (103) - (1,831) (1,934)

Deferred Tax Liabilities ## - (313) (112) (1,831) (2,256)

Net Deferred Tax Assets ## - 17,363 6,712 (167) 23,908

2018

Financing and advances - - - 5,739 - 5,739Own Credit reserve - - - - 943 943Provision for accrued expenses ## - 7,080 858 - 7,938Deferred income ## - 2,380 458 - 2,838Lease receivables ## - 208 10 - 218

Deferred Tax Assets ## - 9,668 7,065 943 17,676

Equipment capital allowances ## - (319) 109 - (210)Own Credit reserve ## (150) (805) 583 222 -Financial investment at FVOCI ## - (57) - (46) (103)

Deferred Tax Liabilities ## (150) (1,181) 692 176 (313)

Net Deferred Tax Assets ## (150) 8,487 7,757 1,119 17,363

120


200801006421 (807705-X)


20 Deposits From Customers

(i) By type of deposit31 Dec 2019 31 Dec 2018

At amortised cost RM'000 RM'000

Non-Mudharabah FundDemand deposits- Qard 3,451,211 1,770,373Savings deposits- Qard 1,872,649 1,689,423Term deposits- Commodity Murabahah 7,942,487 7,789,088- Qard 53,986 195,693

13,320,333 11,444,577

The maturity structure of term deposits is as follows:

31 Dec 2019 31 Dec 2018RM'000 RM'000

Due within six months 6,590,085 6,602,418More than six months to one year 1,099,780 1,042,883More than one year to three years 174,180 264,450More than three years to five years 132,428 75,030Over five years - -

7,996,473 7,984,781

(ii) By type of customer31 Dec 2019 31 Dec 2018

RM'000 RM'000

Government and statutory bodies 12,986 3,780Business enterprises 2,753,651 2,349,937Individuals 6,222,474 6,284,101Foreign entities/individuals 3,945,963 2,511,888Others 385,259 294,871

13,320,333 11,444,577

21 Deposits and Placements from Banks and Other Financial Institutions

31 Dec 2019 31 Dec 2018

RM'000 RM'000Non-Mudharabah Fund

Licensed banks 427,197 579,301Bank Negara Malaysia 20,412 27,971Other financial institutions 1,892,345 2,692,692

2,339,954 3,299,964

Included in deposits and placements from banks and other financial institutions are placements from the Bank's parent company,HSBC Bank Malaysia Berhad, of RM0.4 billion (31 Dec 2018: RM0.6 billion).

121



22 Structured Liabilities Designated as Fair Value through profit or loss (FVTPL)

31 Dec 2019 31 Dec 2018At fair value RM'000 RM'000

Structured liabilities- Wakalah with Commodity Wa'ad 205,951 228,954- Tawarruq 1,089,407 655,923

1,295,358 884,877

23 Other Liabilities

31 Dec 2019 31 Dec 2018Note RM'000 RM'000

At amortised cost

Settlements 96 -Amounts due to holding company 57,735 73,163Profit payable 85,652 87,846Deferred income 38,760 11,824Marginal deposit 3,765 4,245Accrued expenses 26,971 32,928Lease liabilities 25,054 -Other creditors (a) 102,811 58,095Provision on financing and credit related commitments 2,552 2,859

343,396 270,960(a) Other creditors and accruals

Source and use of charity funds 31 Dec 2019 31 Dec 2018

RM'000 RM'000

Balance at 1 January 14 1

Shariah non-compliant income for the financial year[1] 27 16

Contribution to non-profit organisations (15) -Tax expense on Shariah non-compliant income (23) (3)

Balance at 31 December 3 14

[1] Income received from transactions in Financing and Advances and Nostro Accounts.

Included in other creditors and accruals is excess compensation balance and profit earned from inadvertent Shariah non-compliant activities. The contribution was distributed to the non-governmental organisations approved by the ShariahCommittee during the financial year. One (1) actual Shariah non-compliant event has been identified during the financial year(2018: Nil) and rectified in accordance with the requirements of Shariah Governance Framework.

Structured liabilities are measured at fair value over the life of the instruments. Structured liabilities are deposits with embeddedderivatives, of which both profit paid and fair valuation on the structured liabilities are recorded as net income/expense fromfinancial instruments designated at fair value.

122



24 Multi-Currency Sukuk Programme

31 Dec 2019 31 Dec 2018

RM'000 RM'000

Multi-Currency Sukuk Programme (MCSP) 1,265,929 1,755,281

Value Issue Maturity 31 Dec 2019 31 Dec 2018

RM'000 Date Date RM'000 RM'000

At fair value

500,000 16 Oct 2014 16 Oct 2019 - 501,173750,000 27 Mar 2015 27 Mar 2020 751,732 751,993500,000 2 Oct 2018 2 Oct 2023 514,197 502,115

1,750,000 1,265,929 1,755,281

Movement in MCSP

2nd series 3rd series 4th series31 Dec 2019 31 Dec 2019 31 Dec 2019

2019 RM'000 RM'000 RM'000Balance at 1 January 501,173 751,993 502,115Change in fair value other than from own credit risk (917) (1,455) 8,446Change in fair value from own credit risk (256) 1,194 3,636Redemption of Multi-Currency Sukuk (500,000) - -

Balance at 31 December - 751,732 514,197

2nd series 3rd series 4th series31 Dec 2018 31 Dec 2018 31 Dec 2018

2018 RM'000 RM'000 RM'000Balance at 1 January 501,201 751,628 -New issuance during the financial year - - 500,000Change in fair value other than from own credit risk (1,811) 445 1,054Change in fair value from own credit risk 1,783 (80) 1,061

Balance at 31 December 501,173 751,993 502,115

31 Dec 2019 31 Dec 2018

RM'000 RM'000

The cumulative change in fair value due to changes in own credit risk 4,574 2,764

[1] Redeemed on 16 October 2019.

25 Subordinated Commodity Murabahah Financing

31 Dec 2019 31 Dec 2018

RM'000 RM'000Subordinated Commodity Murabahah Financing, at amortised costs- First tranche issued on 25 June 2014 317,957 321,395- Second tranche issued on 30 June 2015 271,655 274,592

589,612 595,987

The Bank issued the following series of 5-year unsecured Sukuk under its RM3.0 billion MCSP.

Carrying Value

Issuance under MCSP

2nd series [1]

3rd series

The unsecured Subordinated Commodity Murabahah financing comprise of two tranches of Basel III compliant Tier 2subordinated financing of USD equivalent of RM250 million each from the Bank's immediate holding company, HSBC BankMalaysia Berhad (HBMY). The tenor for both the Subordinated Commodity Murabahah financing is 10 years from the utilisationdate with profit payable quarterly in arrears.

4th series

123



26 Share Capital

Number ofOrdinary

Shares ('000) RM'000

Number ofOrdinary

Shares ('000) RM'000

At 1 January/31December - ordinary shares of RM0.50 eachOrdinary Shares Issued and Fully Paid 100,000 660,000 100,000 660,000

27 Reserves

31 Dec 2019 31 Dec 2018

RM'000 RM'000

Non-distributableFinancial investment at FVOCI 6,294 479

Own credit reserve [1] (8,257) (2,987)

Capital contribution reserve [2] 537 499

Regulatory reserves [3] 53,100 91,100

51,674 89,091Distributable

Retained profits 1,259,011 1,073,174

1,310,685 1,162,265

[1]

[2]

[3]

31 Dec 2019 31 Dec 2018

The capital contribution reserve is maintained to record the amount relating to share options granted to employees of the Bankdirectly by HSBC Holdings plc.

The regulatory reserve is maintained in compliance with paragraph 10.9 of BNM's policy document on Financial Reportingand Financial Reporting for Islamic Banking Institutions issued on 27 September 2019, to maintain, in aggregate, lossallowance for non-credit-impaired exposures and regulatory reserve of no less than 1.0% of total credit exposures, net of lossallowance for credit-impaired exposures.

The regulatory reserve is debited against retained profits.

Changes in fair value relating to the Bank's own credit risk are recognised in other comprehensive income. This is arising fromstructured product and multi-currency sukuk program.

124


200801006421 (807705-X)


28 Income Derived from Investment of Depositors' Funds and Others

31 Dec 2019 31 Dec 2018

RM'000 RM'000

Income derived from investment of:(i) Term deposit 608,238 624,035(ii) Other deposits 217,900 199,318

826,138 823,353

(i) Income derived from investment of term depositsdeposits

Finance income:Financing and advances- Profit earned other than recoveries from

impaired financing 473,262 493,204- Recoveries from impaired financing 17,831 18,249Financial investments at FVOCI 74,733 58,444Money at call and deposit with financial institutions 62,179 50,009

628,005 619,906

Other operating incomeFee commission - 694Realised gains from dealing in foreign currency 15,931 11,273Unrealised (loss)/gain from dealing in foreign currency (360) 235Gain from sale of financial assets designated as FVTPL

and other financial instruments 864 1,436Unrealised gain/(loss) from revaluation of financial

assets designated as FVTPL 1,416 (623)Net profit received for financial assets designated as FVTPL and

other financial instruments - 1Realised gain from trading in derivatives 1,498 2,728Unrealised gain/(loss) from trading in derivatives 290 (1,298)Net expenses from financial liabilities designated at FVTPL (39,395) (10,305)Other expense (11) (12)

(19,767) 4,129

608,238 624,035

The above fees and commissions were derived from thefollowing major contributors:

Service charges and fees - 694

31 Dec 2019 31 Dec 2018

RM'000 RM'000(ii) Income derived from investment of other deposits

Finance income:Financing and advances- Profit earned other than recoveries from impaired

financing 159,231 153,612- Recoveries from impaired financing 5,999 6,797Financial investments at FVOCI 25,144 21,769Money at call and deposit with financial institutions 20,921 15,141

211,295 197,319

During the year, the Income Derived from Investment of Depositors’ Funds and Others

have been recategorised from i) General Investment Deposits, ii) Specific Investment

Deposits and iii) Others, to just two broad category, ie. i) Term Deposits and ii) Other

Deposits, to be in line with industry practice. Accordingly, the 2018 comparatives has

been restated to reflect the change.

Nine Months Ended

125


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28 Income Derived from Investment of Depositors' Funds and Others (Cont'd)

31 Dec 2019 31 Dec 2018

RM'000 RM'000(ii) Income derived from investment of other deposits (Cont'd)

Other operating incomeRealised gain from dealing in foreign currency 5,360 4,917Unrealised (loss)/gain from dealing in foreign currency (121) 88Gain from sale of financial assets designated as FVTPL

and other financial instruments 291 535Unrealised gain/(loss) from revaluation of financial

assets at FVTPL 476 (232)Realised gain from trading in derivatives 504 1,016Unrealised gain/(loss) from trading in derivatives 98 (483)Net expenses from financial liabilities designated at FVTPL - (3,838)Other expense (3) (4)

6,605 1,999

217,900 199,318

29 Income Derived from Investment of Shareholder's Funds

31 Dec 2019 31 Dec 2018

RM'000 RM'000Finance income:Financing and advances- Profit earned other than recoveries from impaired

financing 62,856 64,295- Recoveries from impaired financing 2,368 2,845Financial investments at FVOCI 9,926 9,112Money at call and deposit with financial institutions 8,258 6,337

83,408 82,589

Other operating incomeFees and commission 67,324 61,920Realised gains from dealing in foreign currency 2,116 2,058Unrealised (loss)/gain from dealing in foreign currency (48) 37Gain from sale of financial assets designated as FVTPL

and other financial instruments 115 224Unrealised gain/(loss) from revaluation of financial

assets FVTPL 188 (97)Realised gains from trading in derivatives 199 425Unrealised gain/(loss) from trading in derivatives 39 (202)Shared-service fees from holding company 2,328 2,400Net expenses from financial liabilities designated at FVTPL - (1,938)Gain on disposal of financial investments at FVOCI 6,605 -Other income 177 19

79,043 64,846

162,451 147,435

The above fees and commissions were derived from thefollowing major contributors:

Service charges and fees 23,312 16,028Credit cards 28,902 30,668Agency fees 7,482 9,361

126


200801006421 (807705-X)


30 Impairment Allowance/Provisions

31 Dec 2019 31 Dec 2018RM'000 RM'000

New and increased allowance/provisions (net of releases) 123,768 110,389Recoveries (48,332) (40,983)Written off 47 38

Total charge to statement of profit or loss 75,483 69,444

Breakdown of the impairment allowance/provisions isdisclosed by financial instruments type are as follow:

(i) Financing and advances

New and increased allowance (net of releases) 124,049 111,254Recoveries (48,332) (40,983)Written off 47 38

Total charge to statement of profit or loss 75,764 70,309

(ii) Money at call and interbank placements maturing withinone month

New and increased allowance (net of releases) 4 1

Total charge to statement of profit or loss 4 1

(iii) Financing commitments

New and increased allowance (net of releases) (299) (891)

Total charge to statement of profit or loss (299) (891)

(iv) Financial investment at FVOCI

New and increased allowance (net of releases) 14 25

Total charge to statement of profit or loss 14 25

31 Income Attributable to Depositors

31 Dec 2019 31 Dec 2018

RM'000 RM'000

Non-Mudharabah Fund

- Deposits from customers 295,756 288,598

- Deposits and placements of banks and otherfinancial institutions 48,219 64,907

- Lease liabilities 1,418 -

- Others 93,242 80,841

438,635 434,346

127


200801006421 (807705-X)


32 Operating Expenses

31 Dec 2019 31 Dec 2018

RM'000 RM'000

Personnel expenses 48,790 48,962Promotion and marketing related expenses 9,666 15,701Establishment related expenses 16,019 17,316General administrative expenses 35,707 39,424Related company expenses 134,899 134,026

245,081 255,429

Personnel expensesSalaries, allowances and bonuses 37,438 38,832Employees Provident Fund contributions 6,634 6,888Share based payment 728 187Other staff related costs 3,990 3,055

48,790 48,962

Promotion and marketing related expenses 9,666 15,701

Establishment related expensesDepreciation of equipment 1,962 2,324Depreciation of ROU assets 6,674 -Information technology costs 2,567 2,983Hire of equipment 313 -Rental of premises 318 8,151Equipment written off 3 1Utilities 2,064 2,008Others 2,118 1,849

16,019 17,316

General administrative expenses 35,707 39,424Auditors' remuneration- Statutory audit fees 156 156- Regulatory related fees 160 210- Non-audit fees - 8Professional fees 1,779 1,819Communication 1,416 1,497Others 32,196 35,734

35,707 39,424

Included in professional fees are fees paid to the Shariah Committee members of the Bank:

31 Dec 2019 31 Dec 2018

RM'000 RM'000

Fees 410 410

Asst Prof Dr Ziyaad Mahomed 89 91

Dr Aida binti Othman 82 75

Dr Khairul Anuar bin Ahmad 81 78

Prof Dr Younes Soualhi 76 73

Dr Mohamed Ashraf bin Mohamed Iqbal 82 76

Assoc. Prof. Dr. Muhammad Yusuf Saleem Ghulam Nabi - 17

128


200801006421 (807705-X)


32 Operating Expenses (Cont'd)

31 Dec 2019 31 Dec 2018

RM'000 RM'000

Related company charges 134,899 134,026Of which by:

Type of service- Information technology related cost 7,840 7,048- Non information technology related cost 127,059 126,978

Countries

- Malaysia 133,846 133,262- United Kingdom 1,053 764

33 Income Tax Expense

31 Dec 2019 31 Dec 2018

RM'000 RM'000Malaysian income tax

- Current year 54,806 51,641- Prior year (6,525) 4,985

Total current tax recognised in profit or loss 48,281 56,626

Deferred tax:Origination and reversal of temporary differences- Current year (6,712) (7,757)

Total deferred tax recognised in profit or loss (6,712) (7,757)

Total income tax expense 41,569 48,869

RM'000 RM'000

Profit before tax 229,390 211,569

Income tax using Malaysian tax rate 55,054 50,777Non-deductible expenses 1,980 847Tax exempt income (8,940) (7,740)(Over)/under provision in respect of prior years (6,525) 4,985

Tax expense 41,569 48,869

34 Earnings per share

The earnings per ordinary share have been calculated based on profit for the year and 100,000,000 number of ordinary shares in

issue during the financial year.

A numerical reconciliation between tax expense and the accounting profit multiplied by the applicable tax rate is as follows:

129



35 Significant Related Party Transactions and Balances

For the purpose of these financial statements, parties are considered to be related to the Bank if:a.

b.

The related parties of the Bank comprise:i

ii subsidiary and associated companies of the Bank's ultimate holding companies; and

iii

(a)

Other Key Other Keyrelated management related management

Parent companies personnel Parent companies personnelRM'000 RM'000 RM'000 RM'000 RM'000 RM'000

IncomeFinance income from financing

and advances - - - - - 12Fees and commission 2,449 6,698 - - 5,280 -Net trading income/expense 64,106 (21,011) - (115,375) (24,038) -Other income 2,328 5 - 2,400 22 -

68,883 (14,308) - (112,975) (18,736) 12

ExpenditureProfit attributable to deposits

and placements from banksand other financial institutions 37,465 38,390 - 49,991 41,493 -

Fees and commission - 443 - - 320 -Operating expenses 125,210 9,689 - 126,184 7,842 -

162,675 48,522 - 176,175 49,655 -

Amount due fromDeposits and placements with

banks and other financialinstitutions (including cashand short term funds) - 63,962 - - 63,559 -

Financing and advances - - 109 - - 153Derivative financial assets 77,080 - - 37,844 - -Other assets 2,093 767 - 360 - -

79,173 64,729 109 38,204 63,559 153

Amount due toDeposits and placements from

banks and other financialinstitutions 427,197 514,597 - 579,301 1,926,092 -

Deposits from customers - - 44 - - 47Derivative financial liabilities 48,454 - - 207,763 - -Other liabilities 58,954 2,729 - 73,965 5,897 -Subordinated commodity

murabahah financing 589,612 - - 595,987 - -

1,124,217 517,326 44 1,457,016 1,931,989 47

the Bank has the ability, directly or indirectly, to control the other party or exercise significant influence over the other partyin making financial or operational decisions, or vice versa, orwhere the Bank and the party are subject to common control or common significant influence. Related parties may beindividuals or other entities.

the Bank's immediate holding bank (hereinafter referred to as parent), and ultimate holding company;

The significant transactions and outstanding balances of the Bank with parent banks and other related companies are as follows:

All transactions between the Bank and its related parties are made in the ordinary course of business.

key management personnel who are defined as those person having authority for planning, directing and controlling theactivities of the Bank. Key personnel include all members of the Board of Directors of HSBC Amanah Malaysia Berhad andcertain members of Senior Management of the Bank. Transactions, arrangements and agreements are entered into by theBank with companies that may be controlled/jointly controlled by Key Management Personnel of the Bank and their closefamily members.

31 Dec 2019 31 Dec 2018

130



35 Significant Related Party Transactions and Balances (Cont'd)

(b) Key Management Personnel Compensation

The key management personnel compensation are as follows:

31 Dec 2019 31 Dec 2018RM'000 RM'000

Directors of the Bank:- Fees 692 668

Total short-term employee benefits 692 668

Total Directors' Remuneration 692 668

for the following:- Professional fees paid to Directors or any firms of which the Directors are members for services rendered.- Amount paid to or receivable by any third party for services provided by Directors.- Indemnity give or insurance effected for any Directors.

Other key management personnel:- Short-term employee benefits 2,212 2,247- Share-based payments 23 -

Total key management personnel compensation 2,904 2,915

During the financial years ended 31 December 2019 and 31 December 2018, there were no such compensation incurred

131


200801006421 (807705-X)



(b) Key Management Personnel Compensation (Cont'd)

i) Directors/CEO' Remuneration

2019

RM'000Non-Independent Executive DirectorsMukhtar Malik Hussain - - - - -Stuart Paterson Milne - - - - -

Independent Non-Executive DirectorsAdil Ahmad - - - 136 136Albert Quah Chei Jin - - - 136 136Ho Chai Huey - - - 121 121Datuk Kamaruddin Taib - - - 166 166

Non-Independent Non-Executive Director

Lee Choo Hock [1] - - - 133 133

- - - 692 692

CEOArsalaan Ahmed 1,658 554 23 - 2,235

2018

RM'000Non-Independent Executive Directors

Louisa Cheang Wai Wan [1] - - - - -

Mukhtar Malik Hussain - - - - -

Stuart Paterson Milne [2] - - - - -

Independent Non-Executive DirectorsAdil Ahmad - - - 117 117Albert Quah Chei Jin - - - 119 119

Ho Chai Huey [3] - - - 94 94

Datuk Kamaruddin Taib [4] - - - 142 142

Lee Choo Hock - - - 119 119

Dr. Mohamed Ashraf bin Mohamed Iqbal [5] - - - 77 77

- - - 668 668

CEOArsalaan Ahmed 1,688 559 - - 2,247

[1] Resigned on 20 March 2018[2] Appointed on 24 May 2018[3] Appointed on 2 January 2018[4] Appointed on 2 January 2018[5] Resigned on 31 October 2018

[1] Re-designated as Non-Independent Non-Executive Director on 30 May 2019. He was previously an Independent Non-

Executive Director.

Salaries and

bonuses

Other short-

term employee

benefits

Shared-

based

payment Fees Total

Salaries and

bonuses

Other short-

term employee

benefits

Shared-based

payment Fees Total

132




(b) Key management personnel compensation (Cont'd)

ii) Total value of remuneration awards for the financial year

Unrestricted Deferred Unrestricted DeferredRM'000 RM'000 RM'000 RM'000

Fixed remunerationCash 1,171 - 1,151 -

Variable remunerationCash 270 180 488 -Shares and share-linked instruments 270 180 - 122

540 360 488 122

1,711 360 1,639 122

Number of officers having received a variable remuneration during the financial year: 1 (2018: 1)

Amount AmountRM'000 RM'000

Outstanding deferred remunerationCash - - - -Shares and share-linked instruments 1 223 1 79

223 79

Deferred remuneration paid out 1 26 - -

36 Credit exposure to connected parties

31 Dec 2019 31 Dec 2018

RM'000 RM'000

Aggregate value of outstanding credit exposures to connected parties 941,338 973,888As a percentage of total credit exposures 5.6% 5.4%

Aggregate value of outstanding credit exposures to connected partieswhich is non-performing or in default - -

As a percentage of total credit exposures - -

The credit exposures of the Bank to connected parties, as defined by Bank Negara Malaysia's Guidelines on Credit Transactionsand Exposures with Connected Parties' are as follows:

31 Dec 2019 31 Dec 2018

31 Dec 2019 31 Dec 2018

Number Number

133



37 Capital Adequacy

31 Dec 2019 31 Dec 2018

RM'000 RM'000

Tier 1 capitalPaid-up ordinary share capital 660,000 660,000Retained profits 1,259,011 1,073,174Other reserves 51,001 88,251Regulatory adjustments (71,428) (94,783)

Total Common Equity Tier 1 (CET1) and Tier 1 capital 1,898,584 1,726,642

Tier 2 capitalSubordinated Commodity Murabahah financing 589,612 595,987Impairment allowance (unimpaired portion) & regulatory reserves 145,014 152,771

Total Tier 2 capital 734,626 748,758

Capital base 2,633,210 2,475,400

Inclusive of proposed dividendCET1 and Tier 1 Capital ratio 14.974% 13.025%Total Capital ratio 20.768% 18.673%

Net of proposed dividendCET1 and Tier 1 Capital ratio 14.580% 12.723%Total Capital ratio 20.374% 18.371%

Breakdown of RWA in the various categories of risk weights:

31 Dec 2019 31 Dec 2018RM'000 RM'000

Total RWA for credit risk 11,601,150 12,221,665Total RWA for market risk 81,799 91,851Total RWA for operational risk 996,092 943,049

12,679,041 13,256,565

The total capital and capital adequacy ratios have been computed based on the Standardised Approach in accordance with theCapital Adequacy Framework for Islamic Banks (CAFIB). The Bank has adopted the Standardised Approach for Credit Risk andMarket Risk, and the Basic Indicator Approach for Operational Risk.

134



38 Commitments and Contingencies

31 Dec 2019 31 Dec 2018Principal amount RM'000 RM'000

Direct credit substitutes 488,882 491,803Transaction-related contingent items 1,281,201 1,138,590Short-term self-liquidating trade-related contingencies 37,007 63,111Formal standby facilities and credit lines

- Maturity not exceeding one year 670,474 1,374,867- Maturity exceeding one year 2,330,664 2,156,256

Other unconditionally cancellable 1,640,484 1,541,548Unutilised credit card lines 3,743,071 3,452,850Equity related contracts

- Less than one year 466,444 116,883- One year to less than five years 396,199 362,229

- Less than one year 1,218,519 2,077,822- One year to less than five years 1,109,410 1,671,166- Over five years - 232,745

- Less than one year 7,471,672 7,837,019- One year to less than five years - 646,019

20,854,027 23,162,908

39 Lease commitments

31 Dec 2019 31 Dec 2018RM'000 RM'000

Less than one year 7,122 7,225Between one and three years 4,944 6,088Between three and five years 235 91

12,301 13,404

40 Capital commitments

31 Dec 2019 31 Dec 2018RM'000 RM'000

Authorised and contracted, but not provided for - 193

The Bank has lease commitments in respect of rented premises. A summary of the non-cancellable long term commitments net ofsub-leases (if any) are as follows:

The table below shows the contracts or underlying principal amounts, positive fair value of derivative contracts, credit equivalentamounts and risk weighted amounts of unmatured off-balance sheet transactions at the statement of financial position date. Theunderlying principal amounts indicate the volume of business outstanding and do not represent amounts at risk.

Profit rate related contracts

Foreign exchange related contracts

These commitments and contingencies are not secured over the assets of the Bank.

135



41 Equity-based compensation

a) Restricted Share Plan and Share Match Schemes

31 Dec 2019 31 Dec 2018Number Number

('000) ('000)Balance at 1 January 5 4Granted in the financial year 9 5Exercised in the financial year (1) -Released in the financial year (1) (2)Cancelled in the financial year (1) (1)Transferred out in the financial year - (1)

Balance at 31 December 11 5

Compensation cost recognised during the financial year 728 187

The weighted average purchase price for all shares purchased by HSBC for awards under the Restricted Share Plan and theShare Match Schemes is £6.05 (2018: £7.16). The weighted average fair value of the HSBC share at 31 December 2019 was£6.34 (2018: £6.99). The weighted average remaining vesting period as at 31 December 2019 for shares granted during the yearwas 1.3 years (2018: 1.26 years).

The Share Match Schemes was first introduced in Malaysia in 2014. Eligible HSBC employees will acquire HSBC Holdingsordinary shares. Shares are purchased in the market each quarter up to a maximum value of £750 or the equivalent in localcurrency over a period of one year. Matching awards are added at a ratio of one free share for every three purchased. Matchingawards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years andnine months.

The Bank participated in the following cash settled share compensation plans operated by the HSBC Group for the acquisition ofHSBC Holdings plc shares.

The HSBC Holdings Restricted Share Plan is intended to align the interests of executives with those of shareholders by linkingexecutive awards to the creation of superior shareholder value. This is achieved by focusing on predetermined targets. Anassessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to begranted. Deferred awards generally require employees to remain in employment over the vesting period and are not subject toperformance conditions after the grant date. Deferred share awards generally vest over a period of three years. Vested sharesmay be subject to a retention requirement (restriction) post-vesting. The cost of the conditional awards is recognised through anannual charge based on the likely level of vesting of shares, apportioned over the period of service to which the award relates.

136



42 Shariah Advisors

1) Asst Prof Dr Ziyaad Mahomed

2) Dr Aida binti Othman

3) Dr Khairul Anuar bin Ahmad

4) Prof Dr Younes Soualhi

5) Dr Mohamed Ashraf bin Mohamed Iqbal

Dr Aida is currently a Partner at Zaid Ibrahim & Co. She is also a Director with ZICO Shariah Advisory Services Sdn.Bhd. She holds a PhD in Comparative Law & Middle Eastern Studies from Harvard University, a Masters of Law fromUniversity of Cambridge and a Bachelor of Laws and Bachelor of Islamic Law (Syariah) (both with First Class Honours),from International Islamic University Malaysia (IIUM).

Dr Ashraf is currently a Director of MindSpring Sdn Bhd, a consulting firm that he started in 2005. He was appointed as anon-executive director for HSBC Amanah Malaysia Berhad for ten years before resigning in October 2018. Dr Ashraf iscurrently an Independent Non-executive Director of Bank Pembangunan and Chairman of Pembangunan Leasing andCredit. He holds a Bachelor of Science in Mechanical Engineering, Masters in Business Administration from CaliforniaState University, United States of America, and a Postgraduate Diploma in Islamic Studies from IIUM. He subsequentlyobtained his doctorate in Islamic Finance from INCEIF in 2016.

In line with Bank Negara Malaysia’s Guideline on Shariah Governance Framework for Islamic Financial Institution, the currentScholars appointed are:

Prof Younes is currently a Senior Researcher at International Shariah Research Academy. He holds a Bachelor, Masterand PhD in Usul al-Fiqh from the Emir Abdul Qadir University for Islamic Sciences, Algeria, IIUM and UniversityMalaya respectively. He also holds a diploma in Human Sciences from IIUM. He is a certified financial plannerregistered under Malaysian Financial Planning Council (MFPC).

Dr Khairul is currently a Senior Lecturer and Deputy Dean of Faculty of Syariah and Law, International IslamicUniversity College Selangor (KUIS). He holds a Bachelor and Master of Shariah from University of Malaya and PhD inIslamic Banking and Finance from IIUM.

Asst Prof Dr Ziyaad is currently an Associate Dean of E-Learning and Director of Executive Education at InternationalCentre for Education of Islamic Finance (INCEIF). He holds a PhD in Islamic Finance from INCEIF, BA (Hons)Business (Finance) from Anglia Ruskin University, United Kingdom, and a Chartered Islamic Finance Professional(CIFP) holder from INCEIF. He also holds an MBA and Certificate in Islamic Law from The Management College ofSouthern Africa (MANCOSA) and University of Kwazulu Natal, South Africa, respectively.

137


200801006421 (807705-X)


43 Comparative Figures

Notes to the Financial Statements31 December 2018

(a) Financing and Advances

RM'000 RM'000As restated As previously

stated

Gross financing and advances 14,371,870 14,445,871Less: Impairment allowance (234,533) (308,534)

Total net financing and advances 14,137,337 14,137,337

(of which the affected components are disclosed below)

By type and Shariah contracts


statedTerm financing:

Other term financing 3,307,216 3,381,217

By type of customerRM'000 RM'000

As restated As previouslystated

Individuals 6,142,634 6,216,584Foreign entities/individuals 1,839,151 1,839,202

By profit rate sensitivityFixed rate:

Other financing 3,300,541 3,341,460Variable rate:

Cost-plus 5,483,023 5,516,105

By residual contractual maturityMaturing within one year 5,895,827 5,895,995More than one year to three years 1,166,130 1,167,759More than three years to five years 1,289,364 1,298,607Over five years 6,020,549 6,083,510

Presentation and classification of items in the financial statements are consistent with those in previous financial year except forthose listed below. The Bank's prior year profit and loss and retained profits brought forward are not affected by thesereclassifications.

(i) Comparatives for financing and advances, impaired financings, and ECL allowances were restated to exclude retail unsecuredfinancing which have been written off but subsequently rescheduled and reinstated. Until 31 December 2018, such financingswere recognised in the statement of financial position with full provision, with no impact to profit or loss. With effect from thefinancial year ended 31 December 2019, these financings are no longer being recognised in the statement of financial position tobe in line with industry practice.

31 Dec 2018

Sale-based ContractsCommodity Murabahah

138


200801006421 (807705-X)


43 Comparative Figures (Cont'd)

(a) Financing and Advances (Cont'd)


stated

By sectorHousehold - Retail 6,706,145 6,780,146

By purposeConsumption credit 2,127,277 2,201,278

By geographical distributionNorthern Region 1,497,309 1,499,020Southern Region 1,464,169 1,464,999Central Region 11,010,829 11,081,704Eastern Region 399,563 400,148

(b) Impaired Financing(of which the affected components are disclosed below)


statedGross carrying amount movement of financing andadvances classified as credit impaired:Gross carrying amount as at 1 January 282,049 322,683Others 18 33,385

Gross carrying amount as at 31 December 356,312 430,313

By contractCommodity Murabahah (cost-plus) 201,946 275,947

By sectorHousehold - Retail 265,333 339,334

By purposeConsumption credit 138,227 212,228

By geographical distributionNorthern Region 37,748 39,459Southern Region 39,453 40,283Central Region 273,061 343,936Eastern Region 6,050 6,635

31 Dec 2018

31 Dec 2018

139


200801006421 (807705-X)


43 Comparative Figures (Cont'd)

(c) ECL allowances(of which the affected components are disclosed below)

Movements in ECL allowances for financing and advancesStage 3 Stage 3

Lifetime ECL Lifetime ECLLifetime credit impaired Lifetime credit impaired

ECL credit Specific ECL credit Specificimpaired provision impaired provisionRM'000 RM'000 RM'000 RM'000

As restated As restated As previously As previouslystated stated

Balance at 1 January 2018 - 74,265 - 114,899- adoption of MFRS 9 110,136 (74,265) 150,770 (114,899)Balance restated 110,136 - 150,770 -Others 241 - 33,608 -Balance 31 December 2018 126,081 - 200,082 -

Statement of Profit or Loss31 December 2018


stateda) Income attributable to depositors 434,346 440,676

(of which the affected components are disclosed below)

Non-Mudharabah Fund- Others 80,841 87,171

b) Operating Expenses 255,429 249,099(of which the affected components are disclosed below)

General administrative expenses 39,424 33,094- Others 35,734 29,404

(ii) Comparatives for Income attributable to depositors and other operating expenses were restated to reclassify deposit protectioninsurance costs from Income attributable to depositors to other operating expenses. This cost represents an annual holding costfor deposits to customers as opposed to an initial transaction cost incurred in accepting the deposit.

140

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